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Almost 12 months ago, we posted a blog noting the changes coming in Capital Gains Tax (‘CGT’) which took effect from 6 April 2020. However, we are constantly having conversations with individuals selling residential properties who are completely unaware of the changes. We therefore thought it would useful to recap these changes, to raise awareness.
The changes were designed to raise additional tax when individuals dispose of residential properties, more quickly, to bring a one-off additional yield of £5-8bn of tax revenue. We’ll see how that worked out for the Government shortly, but the Stamp Duty Holiday probably helped the property market keep moving, at least in the short-term.
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 (£12,300 in 2020/21 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. For a comprehensive understanding and effective management of these alterations, consulting with a seasoned self-assessment accountant is advisable.
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) 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 as well);
- 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 applied 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 could still 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 was 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.
Black and White Accounting
Although we love calculating it, 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.
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