April 2020 is going to bring with it a couple of big changes within Property Tax, all of which fall within the Capital Gains Tax regime.
All of the changes could have costly implications if you have a residential property that you are looking to sell, or gift to a family member, and so you may wish to bring forward the timing of your sale to ensure that the disposal date is on or before 5th April 2020.
Just to clarify, what is my date of disposal?
If the contract for sale is unconditional, then the date of disposal will be the date you exchange contracts. If the contract for sale is conditional, then the date of disposal becomes the date when the condition is satisfied.
This is particularly useful to remember if you are ever looking to buy a new build property, where completion might not occur for several months/years after you exchange contracts.
So, what are these changes?
There are 3 main changes, which are explained in greater detail below:
- From April 2020, Lettings relief will only apply if the letting was undertaken whilst the owner lived in the property at the same time as the lodger.
- Principal Private Residence (PPR) relief – currently the last 18 months of ownership qualify for this relief, even if you do not live in the property at the time. From 6 April 2020 this period reduces to 9 months
- From April 2020 the payment date for CGT on residential properties will become 30 days following the completion date
Lettings Relief changes:
Currently, this relief is available if you have a property that only partially qualifies for PPR relief e.g. you lived in a property for 10 years, and then moved out but let it for a further 5 years before selling.
It is a valuable relief, which could reduce a gain by up to £40,000 per person. If you are couple who are both higher rate taxpayers then this could mean a potential reduction in capital gains tax of £22,400.
It is worth the lower of:
- The PPR relief given on the gain
- The chargeable gain which relates to the period the property was let
From 6 April 2020, this relief will not be available unless you were living in the property at the same time that it was being let – think of it as “lodger” relief
I do wonder who would possibly be able to claim this relief in the future though, as surely you are unlikely to reside in a property with a lodger for any length of time if it was not your main property. I expect most people would therefore be eligible for PPR relief in full, and therefore have no need to claim the new “lodger” relief.
PPR Relief reduction in “deemed” relief:
Previously HMRC allowed this additional relief to account for instances where you had your property on the market but it might have taken a little while to sell. The period used to be 36 months, and yet now, when the property market is not as buoyant as it has been in the past, it will be just 9 months, which does not give you as much time to get that property sale through.
Not so bad if you are still living in the property whilst it is being marketed, but could present a problem for those who are selling 2nd homes, or have had to move into a new house before their previous one has been sold.
I anticipate estate agents and solicitors being under a lot more pressure to get properties sold in the future, which could influence costs of sale
Change in payment date for CGT:
This one is going to be a real sting in the tail for property owners.
Currently you have under 31st January following the end of the tax year in which you sold your property to pay the tax on the sale. E.g. if you dispose of a property on 5 April 2020 then the capital gains tax is payable 31 January 2021.
From 6 April 2020, this payment date will become 30 days after completion has taken place, so if you were to sell that same property on 6 April 2020 then you will have to submit a provisional calculation of any gain and pay the capital gains tax within 30 days i.e. by 6 May 2020
You will still need to declare the Capital Gain on your Self-Assessment return along with your other income, and you will need to adjust for any additional tax that is due or repayable in the normal manner.
If you have accidentally overpaid based on the provisional calculation, then you will have to wait until the submission of your return before obtaining a repayment, which could be almost a 12-month wait for some people
Due to the two rates of Capital Gains Tax that apply to gains on residential property, then for some people the provisional calculation could be quite tricky. I imagine that there will be several underpayments e.g. if you are awarded year-end bonuses with work, but also several overpayments e.g. if you are made redundant or change jobs after the property sale.
It appears as though HMRC have been zoning in on property owners over the last few years. First, there was the restriction to mortgage interest relief, and now the Capital Gains Tax changes.
If you are contemplating selling or gifting a property then it is likely to be more tax efficient, and possibly better for cash flow, if you try to do so prior to 5 April 2020.
Obviously, this will not be the same for everyone, but please feel free to contact us if you wish to discuss Capital Gains Tax planning.