Beware if you’re selling a residential property
Feb 07, 2020
Key Dates Personal Finance
As we put tax return deadline day behind us, another significant date is rearing its ugly head. On 6 April 2020, a major change comes into effect regarding the reporting and payment of Capital Gains Tax (CGT) on residential property disposals. From that date, it will be necessary to report the disposal of a property within 30 days of its completion and pay CGT on account to HMRC.
Currently, i.e. if you sell a residential property before 6 April 2020, the tax you must pay on any gain over and above the annual exempt amount won’t be due until 31 January 2021. You will include your CGT liability on your self assessment tax return, and pay HMRC by 31 January following the end of the tax year, along with your income tax.
Now, following the rule change, if your completion date falls on or after 6 April 2020, there will be a significant acceleration of the payment date. Suddenly, any CGT due will have to be reported to HMRC and paid only 30 days later. So if you complete on your property on 10 April 2020, your CGT will need to be paid by 9 May 2020. You’ll need to complete a standalone CGT tax return, even though you’ll also need to report the gain on your annual self assessment tax return. Note that the amount of tax you pay is calculated based on the date that you exchange contracts, even though the 30 days is triggered by the date of completion.
Why the change?
The aim of this change is to collect tax from the disposal of residential property significantly more quickly. If you’re a personal tax payer, you currently don’t need to pay CGT until between 10 and 22 months after the sale of your property. Reducing this requirement to 30 days buys HMRC an extra yield of well over a year’s worth of tax, which roughly equates to between £5bn and £8bn.
Bearing in mind this change, if you’re planning to sell up you may wish to do so prior to 6 April, allowing yourself a far longer window in which to pay any CGT that you owe. Alternatively you may need to think about reserving funds from the proceeds of your sale in order to pay any tax that’s due. Do note however that the new 30 day rule won’t apply if no tax is payable – i.e. if you’re selling your main private residence and the sale is wholly covered by the private residence exemption.
Another reason to sell
If the draft legislation issued for consultation last year becomes law in the next Finance Act, there will be two other important changes to take into account when selling your property. These changes will affect private residence relief for disposals made from 6 April 2020.
Firstly, the exemption for the final period of ownership will be reduced from 18 months to 9 months. This is intended to give you tax relief if you’ve moved to a new main residence but you’re waiting until your former residence is sold, i.e. “bridging”. For many years this additional allowance was 36 months, but that led to a tax planning strategy referred to as “second home flipping” which HMRC is keen to counteract.
The second change will be the abolition of lettings relief, except in situations where you live with your tenant. At the moment, if you rent out your former main residence, this generous relief provides an exemption of up to £40,000 per property owner. From 6 April 2020 you’ll have to live there yourself too, in order to be eligible to receive it.
Taking into account all these proposed changes, you may wish to consider disposing of a property before 6 April 2020 to take advantage of the current CGT reliefs. This can be a complicated area, so do please let us know if you’d like any help or advice.