Property Tax: Tax on the Sale of Residential Property

Property Tax: Tax on the Sale of Residential Property

There are three major changes on the horizon which will affect the sale of residential properties.

The changes are:

  1. Replacement of lettings relief with lodgers relief
  2. Reduction of the final exempt period
  3. Reporting capital gain

All of the changes come into effect from 6 April 2020.

It is important to bear in mind that the disposal date for capital gains tax purposes is the date that contracts are exchanged rather than the completion date.

None of the changes affect sales where the property has been your main residence for the whole period of ownership.

Infographic showing the property tax changes that are taking place in April 2020, including lettings relief becoming lodgers relief, the reduction of the final exempt period and reporting a capital gain.

Let us look at each of the above in turn.

Replacement of lettings relief with “lodgers” relief

The current position

At present, where a let residential property is sold and it has been your main residence at some point during ownership, as well as receiving exemption from capital gains tax for the period for which the property was your main residence, you can also claim lettings relief for the period for which the property is let.

The amount that you can claim is the lowest of the following:

  • The amount of gain attributable to the let property on a time-apportioned basis,
  • The amount of main residence relief claimed for the period during which you lived in the property, and
  • The maximum amount prescribed by tax legislation of £40,000.

The position from 6 April 2020

Under the new rules, lettings relief disappears, unless you have lived in the property at the same time as a lodger. Such instances would be relatively uncommon.

Reduction of the final exempt period

The current position

Under the current rules, the last 18 months of ownership is always exempt from capital gains tax, provided that you have occupied the property as your main residence at some point during your period of ownership.

The position from 6 April 2020:

From 6 April 2020, the final exempt period is reduced from 18 months to 9 months.

Reporting a capital gain

The current position

All capital gains, including residential property are reported on a self-assessment tax return, which must be submitted to HMRC by 31 January following the end of the tax year. The tax is due for payment on the same date.

The position from 6 April 2020

From 6 April 2020, any chargeable gain on a residential property must be reported to HMRC and the tax paid within 30 days of completion. It may not always be possible to determine the rate of capital gains tax payable due to the interaction between income tax and capital gains tax rates, the possibility of further capital gains or losses arising in the same tax year, etc., so an estimate may be required.

You still have to report any gains on the self-assessment tax return by 31 January following the end of the tax year as well. Any tax paid on account under the “30-day return” is taken into account when arriving at the final liabilities for the tax year.

An example showing the effects of the above changes is given in Appendix A.

The calculations are quite involved but in the typical example attached, the effect of selling the property after 6 April 2020 is extra capital gains tax of approximately £14,000.

Conclusion

The conclusion is that, if you are planning on selling a property which is likely to be affected by the new rules, it would be better to exchange contracts before 6 April 2020.

If you are selling a property likely to be affected but are unable to sell, it may be better to engineer a deemed disposal before 6 April 2020 to crystallise the reliefs before they disappear, for example by transferring the property to a trust prior to sale.

If you feel that you may be affected by the above changes and would like to discuss any aspect of the new rules, please contact our Tax Team.

Please note: This article is a commentary on general principles and should not be interpreted as advice for your specific situation.

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APPENDIX A – Example

Capital gains tax calculation on the sale of a property

Sale under the current rules

Mrs Wainwright, a higher rate taxpayer, is looking to sell one of her buy-to-let properties.

Facts:

  • Date of acquisition: 01/01/04
  • Purchase price: £80,000
  • Expected sale price: £280,000
  • Date of sale: 31/03/2020

From January 2004 to August 2012, Mrs Wainwright occupied the property as her main residence. On 1 September 2012, she moves out of the property to occupy a new main residence and starts letting out the property.

The timeline:

 

Months

January 2004 – August 2012 – Mrs Wainwright’s principal private residence

104

Last 18 months

(18)

Let period (minus the last 18 months)

73

Capital gains tax computation

Capital gains tax calculation on the sale of a property - under the current rules

Due date for reporting the gain and paying the tax = 31 January 2021

Sale under the new rules

All facts are the same except that the property is sold 6 days later than in the first part of the example.

The timeline:

  Months
January 2004 – August 2012 – Mrs Wainwright’s principal private residence 104
Last 9 months (9)
Balance 82
January 2004 – (say) 6 April 2020: Total period of ownership 195

Capital gains tax computation

Capital gains tax calculation on the sale of a property - under the new rules

The gain must be reported by 5 May 2020 and a payment on account of the tax made by the same date.  The gain will also need to be reported on the self-assessment tax return in the usual way.

Please note: This article is a commentary on general principles and should not be interpreted as advice for your specific situation.

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