Capital Gains Tax Changes on Private Residences
Private Residence Relief (“PRR”) provides most home owners relief from a capital gains tax charge on any increase in value when disposing of their main residence which they have continually occupied.
Many owners of UK residential property decide to rent their property which has at some point been their main residence. Prior to 6 April 2020, on disposal of the property, they would be entitled to a deemed period of occupation of the final 18 months of ownership thereby potentially increasing the amount of PRR available.
Changes which were introduced on 6 April 2020
Two main changes were introduced from 6 April 2020.
The first change relates to deemed period of occupation for PRR being reduced from 18 months to 9 months. It is important to remember that this was 36 months up to 5 April 2014 so now represents a substantial decrease. The deemed period of occupation was originally introduced to provide relief for homeowners who moved property but had not been able to sell their former home. The government’s case for reducing the period is that there is a shorter period required to sell a home. This could lead to more homes being subjected to capital gains tax due to insufficient periods of PRR.
Lettings relief was also reformed from 6 April 2020. This was a very valuable relief providing an exemption of up to a further £40,000 on disposal, if at anytime the property has also been your main residence. Now it is only available on a disposal on or after this date where the homeowner is in shared occupation with a tenant and not where the entire property is rented out.
The combination of these changes could have an impact on the decision process if a homeowner is deciding to sell the property or continue renting the property.
Let’s look at an example of a couple selling a property and how the changes will impact them both before and after:
Current market value: £1,000,000
Purchase price: £500,000
Occupied as PRR up to: 01/01/2015
Property held jointly between husband and wife. Both are higher rate taxpayers.
|Gross capital gain||£500,000||£500,000|
|Gain after PRR||£182,927||£219,512||£36,585|
|Lettings relief x 2||£80,000||0||£80,000|
|CGT annual exemption x 2||£24,000||£24,000|
|Taxable capital gain||£78,927||£195,512||£116,585|
|Tax @ 28%||£22,100||£54,743||£32,644|
In this example the net tax effect of selling the property before or after 5 April 2020 is £32,644 and thus not an insignificant amount!
Reporting and payment of capital gains tax on UK residential property
6 April 2020 also saw the introduction of the new reporting and tax payment regime for UK residential property. Non-UK residents will be familiar with these rules as they have been in place since 2015 but they are now being extended to UK residents as well.
Where a UK residential property is now sold and there is a taxable capital gain, this will need to be reported on a property return within 30 days. For capital gains tax purposes the disposal date is the date that the contracts are exchanged on the property. However, for the purposes of making the property return, the deadline will be 30 days after the completion of the sale of the property.
Any tax due on the property sale will also need to be paid within 30 days of completion. The calculation of the tax does not take into account any capital gains tax disposals outside these rules. For this reason, the payment of tax is referred to as the notional tax due and is a payment on account. Any capital losses available can be offset against the capital gain arising on the sale.
Even though a property return is submitted, the disposal will still need to be reported on a Self Assessment Tax Return where the final tax will be calculated with any underpayment of tax due by 31 January after the tax year in question.
HMRC have 12 months from the date on which the property return is submitted to enquire into that return as well as the normal 12 month enquiry window in relation to Self Assessment Tax Return.
With the filing deadline for the property return being at just 30 days, it is important that information relating to any UK residential property history is collated as soon as possible.
From 6 April 2020, these changes coupled with the changes to mortgage interest relief will be reduced so that only a 20% tax credit is available. This may make some individuals consider selling UK residential property.
For further information or a discussion on this subject please contact our Tax Partner, Mark Moore