Second home-owners warned to watch out for a new capital gains tax grab: From next April you could pay more if you sell your old property, warns leading tax expert
- Restrictions to a tax relief on the sale of main home to be introduced from April
- Restrictions to ‘lettings relief’ are also set to be introduced next year
- From April next year, sale of main home needs to be declared in an online return within 30 days from the sale and seller must and pay any capital gains tax due
Richard Morley is partner in Tax Dispute Resolution at accountancy and business advisory firm BDO
Understandably there has been significant focus on which political party was going to form a new government.
Although we can’t be sure the direction Boris Johnson’s Conservative government will take, proposed tax changes that seek to combat tax avoidance and increase tax revenues are likely to remain.
A raft of proposed tax legislation remains in draft form, yet is still set to take effect from April 2020.
This is causing uncertainty for those set to be impacted by these changes, but it also means that there will be little time for Parliamentary scrutiny of the proposals.
Property owners considering a sale should be particularly aware of changes to capital gains tax (CGT).
When a property that was the seller’s main residence is sold, a valuable relief called principal private residence (PPR) relief ensures that no CGT is payable on any gain.
Currently, when you sell a property that has been your main home for only part of your period of ownership, the last 18 months of ownership is always deemed a period of qualifying occupation for the purposes of the relief.
But, proposed April 2020 changes would mean that this period will be reduced to just the last nine months of ownership for property disposals after 5 April 2020.
This reduction means that from 6 April 2020, individuals buying a new home, before selling their old one, will need to ensure a sale of the old property takes place within nine months to avoid a potential CGT charge.
In addition to this reduction in PPR relief, as things stand a restriction to the availability of another CGT relief on the sale of your main home called lettings relief is also set to be introduced this coming April.
Restrictions to lettings and PPR relief are set to come into force in April 2020
Lettings relief provides CGT relief for the periods when a main home is rented out. This is useful when selling a former residence proves difficult and the vendor is obliged to rent it out while trying to sell it.
However from 6 April 2020, lettings relief will be reformed so that it only applies where the owner is in shared occupation with the tenant or lodger.
In the current economic climate, the introduction of these restrictions to lettings and PPR relief may be seen as particularly harsh on home sellers. There will be no phasing out arrangements for these rule changes so there may be some circumstances where it is tax-efficient to complete a sale by 5 April 2020 rather than selling after this date.
In addition, there are also stark logistical and cash flow consequences of selling a property after these proposed changes take effect.
From 6 April onwards, where UK residents sell a UK residential property, rather than waiting to tell HMRC in their tax return for that tax year, they must complete an online return within 30 days and pay any capital gains tax due.
From April next year, those selling their main home must complete an online return within 30 days and pay any capital gains tax due, instead of waiting to until they compile their tax return
For example, if a sale of a buy-to-let property is completed on 1 April 2020, the taxpayer would need to tell HMRC in their 2019/20 tax return which must be submitted by 31 January 2021 and any CGT due paid by the same date.
If instead the sale of the same property was completed on 10 April 2020, the online return must be submitted and any tax paid by 10 May 2020 – that’s eight and half months earlier and quite a cash flow difference.
The proposed reforms to the lettings and PPR relief rules could create significant increases in CGT payable on the sale of a property if the disposal takes place on or after 6 April 2020 and you will have to pay that tax much sooner.
If you are considering selling a property it would be prudent to take expert tax advice imminently so that you can plan ahead for the impact of these likely changes.
Richard is a Partner at BDO with over 25 years of tax experience. He specialises in providing solutions to tax problems and managing investigations and voluntary disclosures with HM Revenue & Customs for both UK domiciled and non-UK domiciled clients.