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. At present, 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.
If the property has been rented out then lettings relief will be available. This is available to each owner and so if there are joint owners of the property, they will each be entitled to lettings relief.
The amount of lettings relief that is available is the lower of:
- The capital gain remaining after claiming PRR
- The capital gain arising during the rental period
Depending on the circumstances, a couple owning a property jointly could potentially reduce their capital gain by £40,000 each.
Changes to be introduced 6th April 2020
The government announced that there will be changes 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 will also be reformed from 6 April 2020 so 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 considering the sale of 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 not an insignificant amount!
Reporting and payment of capital gains tax on UK residential property
6 April 2020 will also see 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 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, it will still need to be reported on the 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 interest relief will be reduced so that only a 20% tax credit is available. This may make some individuals consider selling UK residential property and if this is the case some consideration should be given to making the sale before 6 April 2020.