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In just a few days, two big changes are coming to Capital Gains Tax (‘CGT’), which will raise additional tax when individuals dispose of residential properties and HMRC will collect the tax significantly more quickly from the taxpayer. As these changes are in legislation already, only more legislation could reverse this, so even with coronavirus at large, there doesn’t seem to be any abating these changes (although we’d love to be wrong here) and indeed once we come out the other side of this, the increased revenue will be in even more need than before.
Payment for CGT is currently 10 to 22 months after the chargeable event, reducing this to 30 days will likely bring a one-off additional yield of £5-8bn of tax revenue. In addition to this the reduction of the final period of ownership for private residence relief and essentially abolishing letting relief are all discussed further below.
About Capital Gains Tax
CGT was first introduced in 1965 on gains made on the disposal of assets by individuals, personal representatives and trustees. In 2018/19 this tax alone raised £9.2bn in revenues for HMRC, which was the highest annual amount since 2005/06 and approximately 1.5% of total annual tax revenue. An annual increase of 18.6%, the growth has been driven by increasing property prices over the last two decades, more landlords selling their buy-to-lets due to the changes in property taxes, shareholders cashing in long-term gains during a benign stock market and foreign investors purchasing UK assets and businesses following sterling weakness after the 2016 EU Referendum.
Capital Gains Tax on residential property
If you, as an individual or partnership, sell a property in the UK, you may need to pay CGT on any profits made, subject to certain exemptions, including the property being your main home (‘Principal Residence Relief’). This is commonly the case for example, when you sell a second home, or buy-to-let property.
The capital gain is the difference between the disposal proceeds and the cost of acquiring the property and improving it, which is then taxed at the relevant tax rate after any annual exemption (£12,000 in 2019/20 per individual, but see our rates page for more details). Individuals pay CGT on residential properties at 18% or 28% depending on whether they are standard or higher rate tax payers, factoring in any capital gains will be included when working out your tax status for the year, and may push you into a higher bracket. With other assets, the basic-rate of CGT is 10%, and the higher-rate is 20%.
Earlier payment of CGT on residential property
This change, originating from George Osborne, but whose implementation was initially delayed, essentially strips out the initial computation of any gain from the self-assessment system and makes it a standalone report and payment, although self-assessment taxpayers will continue to also report the gain on their tax returns, for all residential property sales after 6th April 2020. The result is any tax on the gain will need to be paid within 30 days of the transaction, rather than in the self-assessment tax return of the individual who owns the property, which would be 10 to 22 months after the chargeable event, or completion date. Following this change initiated by George Osborne, property owners now face a separate report and payment for gains within 30 days of the transaction, necessitating a nuanced approach that a self-assessment accountant can help navigate effectively.
Returns, Amendments, Enquiries and Payment
A return must be filed within 30 days of the date of disposal, including a declaration by the person making it that the return is to the best of the person’s knowledge correct and complete. However, this return is not required for ‘no gain-no loss’ disposals, nor for disposals where no tax is due. Available capital losses can be utilised to reduce any tax due, subject to the usual rules.
Where there is more than one disposal in a year, the tax is calculated after each disposal, factoring in the previous disposals in the year, so the cumulative amount of Capital Gains Tax is calculated each time a disposal is made, with the net tax due (overpaid) is due for payment (refund).
The usual 12 month period for amending returns remains, but they can only be amended in respect of events that have already occurred at the date the return was delivered.
The usual enquiry windows will also apply and if a self-assessment tax return is enquired into, it is deemed that any gains shown within that return will also be deemed under enquiry.
The payment is also calculated and due to be paid within 30 days of the date of disposal. The amount paid is referred to as a payment on account of the CGT for that year, as it is effectively an interim payment of Capital Gains Tax with the final calculation of the total CGT liability being performed, as usual, through the self assessment system, at least for now.
CGT on Principal Residence Relief
Generally, you won’t pay Capital Gains Tax when selling the property you live in, due to the ‘Principal Residence Relief’.
Provided the property genuinely has been your main home at some point, you won’t need to pay capital gains tax for the time it was your main residence, plus the past 18 months of ownership (even if you weren’t living in the property during those 18 months). People with a disability or those who move into a care home can claim for up to the past 36 months of ownership.
Examples of when you might still get a CGT bill include when you:
- Convert part of it into flats;
- When you use part of your home exclusively for business;
- Bought a home for the purpose of doing it up and selling it on;
- Let out all or part of your home (excluding having a single lodger when you live in the property aswell);
- Sell part of the garden or your total plot, if the area you’re selling, is more than half a hectare (1.2 acres); and/or
- Where you moved out of the property 18 months or more ago (soon to be 9 months, as below), for example to move into a partner’s home.
Changes to Principal Residence Relief
From 6th April 2020, private residence relief will apply to the time you lived in the home, plus the final 9 months of ownership – instead of the final 18 months. However, people who move into a care home, or have a disability will still be able to claim for the last 36 months of ownership. People will still be able to claim private residents relief for any period where the property was their main home.
Rental Relief on Capital Gains Tax
If you have let out part or all of your home, a proportion of any gain when you sell it could be taxable. But if you used to live in the property, you may be able to claim letting relief, which will reduce your capital gains tax bill. Letting relief doesn’t apply to buy-to-let investors who let out their properties and never live in them.
Currently, the amount of letting relief you can claim will be the lowest of:
- The gain you receive from the letting proportion of the home;
- The amount of private residence relief you can claim; or
- £40,000.
Please note you cannot claim private residence relief and letting relief for the same period. This means if you are letting the property out when you come to sell, the past 18 months of ownership (soon to be 9 months) qualify for private residence relief rather than letting relief. The exact amount of private residence relief and letting relief you can get depends on the amount you sell the property for.
Letting Relief ‘Abolition’
From 6th April 2020, rental relief is being scaled back so it is only available for people who were in shared occupancy with a tenant. Anyone who has lived in a property and now rents it out is likely to be hit by this change and, as a result, could face a larger capital gains tax bill.
Potential Issues with the changes
Several potential issues come to mind resulting from these changes:
- Establishing which tax rate to use, i.e., 18% or 28% can be difficult, especially if you have varying levels of income each year, for example if you are self-employed. Whilst the self-assessment tax return will “true-up” the tax to ensure the right amount is paid, there will be big interest and penalties for those who underpay their tax here. This is likely to lead to individuals overpaying and reclaiming in their next tax return, if they can afford to do so, from a cashflow perspective. Indeed, some individuals who previously didn’t submit a tax return may now look to do so, to ensure they do not overpay their tax.
- The changes have not been widely reported, so may not be widely known. The government seems to have a preference for leaving it to the Accountants to spread the bad news. Hence why we are writing this blog to raise awareness. If as we suspect, this is the case, it could result in filings and payments not being made in time, accruing interest and penalties and potential special attention from HMRC. Please spread the word to anyone who this might apply to. It’s a shame there isn’t a ‘soft landing’ process for the introduction of this change, like other changes in the tax regime recently.
- More complexity, means potentially more incorrect filings and penalties for individuals, who do not get the right support.
- Even if the you are aware of the changes, it will still be a challenge to get all the right information required to compute the gain within the timescale. HMRC authorisation and details of the process are still, at this stage, unknown.
- There could be additional tax from the sale of a main residence (partial rather than full relief), which will also interact with the CGT calculations, further complicating the calculations, especially with the tight timelines.
Update 16th April 2020
HMRC has confirmed it will not charge penalties for the late reporting of capital gains tax (CGT) on disposals of UK residential property by UK residents up to and including 31 July 2020. However, interest will continue to accrue if the tax remains unpaid after 30 days. This means transactions completed between 6 April and 30 June 2020 and reported up to 31 July 2020. Transactions completed from 1 July 2020 onwards will receive a late filing penalty if they are not reported within 30 calendar days, as outlined above.
This grace period has been provided to give those selling properties time to familiarise themselves with the change in rules and online process.
Black and White Accounting
CGT is unfortunately not an easy tax to get your head around. If you might have a tax liability from a capital gain, we really encourage you to talk to an adviser, be that us or someone else, to ensure you pay the right amount of tax, on time, and can move onto more important things in your life.
If there is anything we can do to help with Capital Gains Tax or anything else, please do get in touch by contacting Black and White Chartered Certified Accountants, populate the “Got a Question” form on the right, or call us on 0800 140 4644.
