Residential Property and Capital Gains Tax Changes
Expected changes to have a significant impact for UK resident taxpayers!
Significant changes to capital gains tax for UK resident tax payers on the disposal of UK residential property have been announced. They take effect from 6 April 2020 and will have a substantial impact for:
- The payment date for capital gains tax
- Reducing the final period for main residence exemption
- Restricting lettings relief
In a small compromise, two extra statutory concessions will become law.
60 Day Payment for Residential Property Gains
UK residents must file a CGT UK property disposal return if a CGT payment is due on disposal of UK residential property. The date of completion determines when the CGT UK property disposal return must be filed and any tax due paid. The reporting and payment deadline is currently 60 days from completion. The 60-day deadline applies to completions on or after 27 October 2021. A 30-day deadline applied previously from 6 April 2020.
If there is no gain due to PPR, or no CGT due for payment, there is no requirement to file a CGT UK property disposal return.
Where that is not the case, you will need to get focused on calculating the gain soon after the sale, as late filing penalties and interest will apply in cases of not making the return or failing to pay within the 60 days allowed (30 days for disposals completed on 6 April 2020 to 26 October 2021).
Good records will need to be kept to calculate the gain, for example, the purchase price, subsequent acquisitions, any improvements expenditure and incidental professional fees. It may also be necessary to instruct a valuer to assist in calculating the gain and any apportionment between permitted area and non-permitted area. Non-UK residents must file CGT property returns on all disposals of land and property, not just residential property (subject to limited exceptions for ‘excluded disposals’, such as transfers made to an individual’s spouse on a no gain no loss basis, which are not reportable), even if they have not realised a gain and no CGT payment.
Final Exempt Period for Main Residence Exemption
If a property has been the owner’s only or main residence throughout the entire period of ownership, then the capital gain arising is wholly exempt from capital gains tax. If however there is more than one property used as a residence, there is the possibility that the property disposed of may not qualify for main residence exemption if another property has been nominated as the one to be regarded as the main residence.
When nominations are involved, quite often only part of the period of ownership will qualify for the exemption, although in all cases where the property qualifies in part for the exemption, the final period of ownership will be deemed to be occupied as the main residence in any event and will therefore qualify for exemption in respect of this final period of ownership.
This final period of ownership has been 18 months since 6 April 2014. From 6 April 2020, the final exempt period will in most cases be further reduced to 9 months only. For disabled persons and those living in care homes, the final exempt period will continue to be three years after 6 April 2020, which was the position existing for all tax payers prior to 6 April 2014.
Restriction of Letting Relief
In addition to the main residence exemption, there was a further relief, known as “letting relief” which homeowners often claimed when selling a property which had been their main residence but which they had vacated and let to tenants. Letting relief was up to £40,000 per individual, and therefore for a couple could be up to £80,000. In addition, the letting relief could be available on multiple properties, if they had each qualified for the main residence exemption. From 6 April 2020, whilst letting relief continues at £40,000, it will only apply to those who share occupancy with the tenant. It is expected that this will significantly reduce the number of disposals to which lettings relief is available.
Late Nominations
The first concession to be legislated relates to late nominations specifying which of two of more residences are to be treated as the main one qualifying for the main residence exemption. Normally, a period of two years from the date on which more than one residence is available is allowed for making the nomination.
Delay in Commencing Occupation
The second concession to be legislated concerns delays in taking up occupation of a main residence. Normally, the main residence exemption only accrues from the date occupation commences. If the property has not been the residence of another individual between the date of acquisition and the taking up of occupation, then that period will be a period of deemed occupation if the property is subject to building works (for up to 24 months), or the individual is disposing of their previous or only or main residence (for up to 12 months).
Planning Points
There are a number of planning points:
- On almost any analysis, if a sale of a property is contemplated, then it should be completed before 6 April 2020.
- The sale of a buy to let property which has previously been a main residence is most likely to be affected by at least one of these changes.
- You will need to plan ahead to ensure that the capital gains tax computation can be prepared in time to meet the new 30 day deadline for filing the tax return and payment of the capital gains tax following a sale.
Whilst representations have been submitted to HMRC in response to these changes by the accountancy and taxation bodies, it is expected that legislation enacting these changes will come into force on 6 April 2020, although it is possible that some amendments to the current draft legislation may be made.
Summary
The government’s focus on extracting capital gains tax from residential properties is now firmly on UK resident taxpayers. For the multiple residential property owner, these changes will have a significant impact and professional advice is most likely to be needed.
