If you are in the process of currently selling a second residential property or one which you lived in and then let out, you may wish to see if contracts can be exchanged by 5 April 2020 as with effect from 6 April 2020 the capital gains tax regime on the sale of residential property will be changing.
The main change is the reporting requirement on the sale of a residential property. For a disposal where the exchange of contracts is before 6 April 2020, the capital gains tax calculation should be included on your 2019/20 self-assessment tax return. The deadline both for submitting the tax return and for paying any capital gains tax liability is 31 January 2021.
However, for a property sold from 6 April 2020 onwards, a standalone online return will need to be filed and a payment on account made in respect of the capital gains tax liability within 30 days of the date of completion.
There are some exceptions when the online capital gains tax return does not need to be submitted to HM Revenue & Customs. These include for example, when the capital gain is covered in full by principal private residence relief.
If an unconditional exchange of contacts takes place by 5 April 2020 but the date of completion is 6 April 2020 or later, the disposal should be reported on your 2019/20 self-assessment tax return in the usual way.
Principal Private Residence Relief and Lettings Relief
There are also some notable changes to principal private residence (PPR) relief and lettings relief:
PPR relief is available for any period where a residential property has been your only or main residence. For disposals before 6 April 2020, any property that has been your only or main residence at any point during the period of ownership will automatically qualify for PPR relief for the last 18 months of ownership.
For disposals from 6 April 2020 onwards, the final period of ownership for PPR relief purposes will be reduced to 9 months.
In addition, for disposals before 6 April 2020, if a property qualifies for PPR relief then lettings relief is also available for any period when the property is let or available for let. Lettings relief is restricted to the lower of the relief for the actual period or periods that the property was let, the available PPR relief, or £40,000 (£80,000 where the property is owned in joint names).
However, for disposals from 6 April 2020 onwards, lettings relief is only available for periods where the owner has shared occupation with a tenant or tenants. This will effectively remove the availability of lettings relief on most rental properties.
What is the impact going to be of these changes?
So how are the changes going to impact you if you are currently in the process of selling a residential property or you are considering selling a residential property in the future.
The two examples below highlight the position pre 5 April 2020 and post 5 April 2020.
Example 1 – Pre 5 April 2020
Mrs Smith is a higher rate taxpayer. She bought a house in April 2011 for £200,000 and lived there until April 2014 when she moved to rental accommodation for a new job. The house was let until March 2020 when it was sold for £500,000.
The gain on the disposal is £300,000 and PPR relief of £100,000 is available for the 3 years of residence. Further PPR relief of £50,000 is available for the final 18 months of ownership and Mrs Smith is also entitled to lettings relief of £40,000.
The net capital gain is £110,000. After deducting the capital gains tax annual exemption of £12,000, the taxable gain is £98,000. Capital gains tax is charged at 28% giving a liability of £27,440 which is due for payment by 31 January 2021.
Example 2 – Post 5 April 2020
Mrs Smith’s first buyer pulled out of the sale and, although she found a new buyer very quickly, contracts were not exchanged until 10 April 2020. The sale was completed on 18 April 2020.
The gain on the disposal is still £300,000 and PPR relief of £100,000 remains available for the 3 years of residence, but the PPR relief for the final period of ownership is now restricted to £25,000. Mrs Smith did not live in the property at the same time as her tenants, so lettings relief is not available.
The net capital gain is £175,000. After deducting the capital gains tax annual exemption of £12,000, the taxable gain is £163,000. Capital gains tax is charged at 28% giving a liability of £45,640 which is due for payment by 18 May 2020. The disposal also has to be reported to HM Revenue & Customs by 18 May 2020.
As you can see from the examples, as a result of the contracts being exchanged after 5 April 2020, this has led to an increase in capital gains tax of £18,200, as well as less time to report the disposal to HM Revenue & Customs.
Here at Plus Accounting we will be very happy to help you with your capital gains tax queries with our personal tax advisory service.
Author: Anthony Barron, Personal Tax Manager @ Plus Accounting
Any views or opinions represented in this blog are personal, belong solely to the blog owner and do not represent those of Plus Accounting. All content provided on this blog is for informational purposes only. The owner of this blog makes no representations as to the accuracy or completeness of any information on this site or found by following any link on this site.
Date Published: 16 March 2020