Important changes to capital gains tax come into force on 6 April 2020 which affect home owners and owners of second or holiday homes.

In this article we look at what these changes are and how they could cause unexpected difficulties for home owners.

Private residence relief

In general, capital gains tax is not payable on the increase in value of a property when you sell your only or main residence, because of a very valuable tax relief known as 'Private Residence Relief'. This relief can apply even if you have not lived in the property for the whole time that you've owned it, although the relief may not then fully apply. There has always been a grace period to allow you time to sell your home without having to pay tax, but this has decreased from the final 3 years of ownership to the final 18 months and the bad news is that with effect from 6 April 2020, this grace period will be reduced even further to 9 months. This is despite the fact that in a Government consultation, most people considered this 9 month period as too short, especially in the current UK property market.

Lettings relief

There is another relief, known as 'Lettings Relief', which can also apply to the sale of a property which qualifies for Private Residence Relief. This relief applies where you have let your principal private residence during your period of ownership. The relief can exempt a gain relating to a period of letting up to a maximum of £40,000 per individual, or £80,000 for married couples. With effect from 6 April 2020, lettings relief will only apply if the owner is also in occupation during the letting, which will mean that a huge number of people who would have benefitted from lettings relief, will no longer get this relief on a sale of their property. The impact is immediate, in the sense that the draft legislation will not permit lettings relief for any period prior to 6 April 2020 where the seller was not in occupation. It is therefore being referred to as 'cliff-edge' change!

Case study

Mr and Mrs Palmer purchased their first home as a couple on 5 April 1995 for £80,000. They lived in the property for 15 years and then, as their financial circumstances improved, in 2010 they decided to move into a bigger home. Initially they intended to sell their existing home, but after a lack of viewings they decided to let it instead. The property remained let from 2010 until they decided to sell the property in 2020 to fund the purchase of a holiday home in Spain.

The following calculations demonstrate the position pre and post 6 April 2020, illustrating that the a significantly bigger CGT bill (£25,088) is payable in a much shorter period. For simplicity, the calculations assume that they are higher rate taxpayers and have used their full annual CGT exemptions.

Change of plan?

So what can you do if this applies to you? 

If you are thinking about selling your property, then you should bring this forward, if possible, but contracts would need to be exchanged on or before 5 April 2020 as it is the date of exchange (not completion) which is important for CGT.

If that is not possible, you may have other assets, for example investments standing at a loss, in which case if you sell such assets first, those losses will be available to offset the gain on your residence.

The new tax reporting and payment regime

Currently if you sell a UK residential property you have to report the gain in your annual tax return and pay any tax due, no later than 10 months after the end of the relevant tax year. Under the new regime which applies from 6 April 2020, you will have to complete a 'residential property return' and pay any tax within 30 days of completion, which doesn't give much time to get your house in order. Where the property has always been occupied as your main residence it won't be necessary to complete a return because full Private Residence Relief will be available. However, a return has to be completed in more complicated cases such as where there are gaps in your occupation of the property, or properties consisting of multiple buildings, or a divorce or separation process. If this applies to you, you should take advice well in advance of any sale.

Whilst the new regime might seem fairly straightforward for most individual homeowners - after all they will have the sale proceeds available to pay the necessary tax, the new regime may not be so straightforward for other owners of property, such as executors, personal representatives and trustees. All this will need to be considered when planning a sale strategy.

The new regime cannot be ignored as there will be penalties for non-compliance and, of course, interest for any late payment. It is hoped therefore that HMRC may apply a light touch to penalties in the early stages of this new regime.

As ever, when it comes to tax, the 'devil is in the detail' and we would urge any individuals to whom these changes might apply to discuss their particular circumstances with a qualified tax advisor.