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The changes to Capital Gains Tax if you own residential property, and how they will affect you

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The changes to Capital Gains Tax if you own residential property, and how they will affect you

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3 minute read

If you own a residential property in the UK, the tax changes from April 6th 2020 relating to Capital Gains Tax (CGT) are highly relevant.

Any gain made on the sale of a residential property is potentially liable to Capital Gains Tax.

The change means that tax is now due within 30 days of the completion date. The government want to collect the revenue much sooner than before.

This blog highlights the key changes. The changes are significant for property owners such as buy-to-let landlords. Cash flow issues, as well as tax notifications, could become a real headache.

According to The Guardian newspaper, one in 10 UK adults or 5.2 million people own a second property.

So what has changed?

The Capital Gains Tax due on a property gain used to be paid in the January of the following tax year via your self-assessment tax return (SATR). For example, if the completion took place in June, the tax was due 19 months later.

This gave you plenty of time to work with your accountant and submit the correct figures. You could set aside cash and earmark it for the tax due. There was plenty of breathing space.

That all changes from April 6th 2020. The correct tax needs to be calculated, notified and paid to HMRC within 30 days of completion. Little or no breathing space. HMRC may apply penalties and interest if the timing isn’t met.

How much tax is due on a property gain?

Unlike non-property related capital gains which are charged at 10% or 20%, the Capital Gains Tax on a property is charged at 18% or 28%.

The different rates depend upon the tax band the gain falls into when added on top of your income (18% on any gain falling in the basic rate band and 28% on any balance).

Individuals have an annual CGT allowance of £12,300 in 2020/21.

What properties are affected?

Second homes, holiday homes, investment property and buy-to-lets are all affected. Your main residence can be affected if it doesn’t qualify for full private residence relief from Capital Gains Tax. Even an inherited property that isn’t used as your main home. The change is effective for disposals on or after April 6th 2020.

Paperwork, record-keeping and time spent liaising with your accountant will probably increase.

If you are planning to sell a property (that doesn’t qualify for full private residence relief), it makes sense to get your paperwork up to date. The purchase price, expenses and costs, refurbishments and the like.

What transactions are unaffected?

If you had a legally binding contract for sale before 6th April.

If the property met the criteria as your private residence throughout your period of ownership.

Where the sale was made to a spouse or civil partner.

Where the total chargeable property gains in the same tax year are within your tax-free allowance (called the annual exempt amount).

The property was sold at a loss.

Or the property is outside the UK.

What about trusts?

The trust needs to be registered with the Trust Registration Service.

The agent for the trust for a UK resident who disposes of a UK residential property must also comply with the 30-day ruling.

Are there any related tax changes?

Yes. When gains are recorded on your SATR, they could be offset by any losses in the same tax period.

From April 6th tax on any property-related gains needs to be paid irrespective of any losses elsewhere. It is treated as ‘an amount notionally due’ and will be balanced out through your SATR when it is submitted. This could cause you cash flow concerns.

You may have to make several tax payments if you frequently buy and sell property. HMRC may apply penalties for late or inaccurate payments.

You will be expected to include the gain on your SATR even if you have paid the interim tax to HMRC.

You won’t need to make a property return if there was no gain/loss on the transaction.

What if you are selling your main residence?

Take great care for your main residence if there have been absences due to working abroad. Or during a divorce or separation. There are bound to be anomalies and teething troubles.

If your main property has been rented out, you could be eligible for letting relief up to £40,000 on any gain. If you owned the property jointly, you could both get the relief. The new rules change that and mean that letting relief can only apply if you were still living in the property during the time it was let out.

It could take a long time to sell your main home. The old rules allowed you an 18-month qualifying period after moving out of your home, where private residence relief still applies. From 6th April this reduces to nine months.

People moving into a care home or who have a disability keep the current period of 36 months.

Don’t forget the 3% Stamp Duty surcharge when buying a second home

The stamp duty rates are different based on whether you own one or more properties.

Caravans, mobile homes and houseboats are exempt from stamp duty.

The changes may appear insignificant but may cause disruption and cash flow concerns. Advance notice to your accountant makes a lot of sense.

Capital gain tax graph

If you need help making sense of the changes, or if you may have cash flow constraints, get in touch with one of our chartered financial planners.

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