Important Changes to Capital Gains Tax

Changes to Capital Gains Tax, Private Residence and Letting Reliefs  

From today, 6th April 2020, the government is making a number of changes to Capital Gains Tax, Private Residence and Letting Reliefs on properties.

The changes can be summarised as follows:

1. 30 days to tell HMRC and pay any CGT Tax owed on property sales 
2. Transfers between married couples equalised 
3. Final period of ownership reduced from 18 months to nine months 
4. Lettings relief unavailable for periods where owner is not occupying

Broadly, all of the above changes apply to transactions undertaken from 6th April 2020.

Change 1 – need to report and pay tax

Arguably the most significant change is that from the 6th April 2020, a UK resident who sells a residential property in the UK will have 30 days to tell HMRC and pay any Capital Gains Tax (CGT) owed.

HMRC are currently developing a new online service to allow taxpayers to report and pay any CGT owed.

A CGT report and accompanying payment of tax may be required where the taxpayer sells or otherwise dispose of:

- a property that they have not used as their main home;
- a holiday home;
- a property which has been let out for people to live in;
- a property that has been inherited and not used as a main home.

There is no requirement to make a report or make a payment of tax when:

- a legally binding contract for the sale was made before 6th April 2020;
- the individual satisfies the test for Private Residence Relief (generally a main residence);
- the sale was made to a spouse or civil partner;
- the gains (including any other chargeable residential property gains in the same tax year) are within the tax free allowance known as the annual exempt amount (£12,300 in 2020/21);
- the property is sold for a loss; or
- the property is outside the UK.

Subject to certain exceptions, where there has been a disposal of a residential property, payment on account of the CGT will be due on the filing date for the return, which is generally within 30 days of the day after the date the property sale is completed.

The payment on account required is the amount of CGT notionally chargeable at the filing date. This is the tax that would be due if, under the normal rules for calculating chargeable gains for a tax year, the tax year ended at the time the disposal is completed.

In calculating the amount, any unused allowable losses for capital gains purposes incurred by the time the disposal is completed can be used. Available reliefs and the annual exempt amount are applied in the normal way.

The amount of CGT payable on account is the amount after applying the applicable rate of tax to the net gain.

Since the 30-day payment window can make it difficult for some people to provide exact figures, HMRC allow for certain estimates and assumptions to be made. The taxpayer can make a correction once the exact figures are known, most probably when submitting their self-assessment tax return.

If the resulting amount is higher than the amount previously paid, the difference becomes payable to HMRC and interest may be due. If the amount is lower, the difference becomes repayable along with repayment interest from HMRC.

Currently the need to report a capital gain and pay tax on the gain is 31 January following the tax year in which the disposal is made so the new requirements are a significant reduction in timescales.

Change 2 – transfers between married couples

For many, owning and selling their own home is thought to be tax-free but, as always, tax is never quite as simple as that.

Principal Private Residence Relief (PPRR) is a set of tax rules which are designed to ensure that the sale of a person’s home is exempt under certain conditions. Generally, if you own one home, live in it and sell it, any gain will be tax-free but suppose you lived elsewhere due to a work secondment and let your old home out, then what?

The existing rules can be complex but allow PPRR for a number of specific absences from the property, including periods of letting.

The general rule for capital gains tax (CGT) is that transfers of assets between married couples and civil partners takes place at no-gain/no-loss. In addition, the PPRR rules provide that where one spouse makes a transfer of their only or main residence to the other, the receiving spouse inherits the other spouse’s period of ownership of the dwelling even if that period started before marriage. This rule does not however apply to a dwelling which is not their main residence at the time of the transfer. There may be positive or negative effects of a transfer depending on the relevant circumstances.

To make the tax rules consistent, the new rule provides that when a spouse or civil partner transfers an interest in a dwelling to their spouse or civil partner (whether or not the dwelling is their only or main residence at the time), the receiving spouse or civil partner will inherit the transferring spouse or civil partner’s ownership history, including their previous use of the property.

Change 3 – the final period of ownership

Generally, the final period of ownership of a person’s home will be tax-free, irrelevant of whether it is actually occupied as such. The final period exemption will be reduced from 18 months to nine months. The rules which give 36 months relief to those with a disability, and those in or moving into care, will not change.

Change 4 – lettings relief

Lettings relief was introduced to ensure that people could let out spare rooms within their property on a casual basis without losing the benefit of PPRR. The government considers lettings relief extends much further than the original policy intention and also benefits those who let out a whole dwelling that has at some stage been their main residence.

The new rules state that where a gain arises on a person’s home and, at any time in the individual’s period of ownership: 
part of the dwelling-house is the individual’s only or main residence; and
another part of the dwelling-house is being let out by the individual as residential accommodation otherwise than in the course of a trade or business
then lettings relief may be due.

Effectively, this means that lettings relief will not be available for those periods where an owner has moved out of the property and therefore no longer shares occupation with a tenant or tenants.

What to do next?

As can be seen, the above changes may be both complex and financially significant, particularly the changes to lettings relief which are effectively retrospective. If you think that any of the changes may apply to you, please get in touch as soon as possible to discuss possible planning opportunities.