As we charter into unprecedented times amidst Covid-19, we are mindful that focus will shift to more pressing concerns and we hope that our clients and contacts all stay safe.
With the start of the new tax year (6th April 2020) on our door step, new rules for property sellers are coming into effect that may impact you and your clients.
Where the sale of your UK residential property triggers a capital gain, the gain will need to be reported and the associated capital gains tax (CGT) paid within 30 days from completion of the sale.
Previously, any capital gain from the sale of a residential property did not need to be reported, nor the CGT paid, until 31st January following the tax year of the sale, via an individual’s regular Self-Assessment tax return filing.
Non-resident landlords were targeted to make an accelerated payment of NRCGT from 2015, so this change represents a further move in the same direction. Non-residents will also no longer have the option of deferring the CGT payment until the Self-Assessment filing deadline.
Trustees (UK and non UK resident) are also exposed to the new rules.
Given the tight window (30 days) and complexities of calculating the associated capital gain, obtaining tax advice as soon as the terms of a sale are being negotiated, is advisable.
We can also provide guidance on the new reporting and payment requirements so that you do not become exposed to late filing and payment penalties, as well as interest on unpaid tax. Please note that HMRC will be able to enquire into the property disposal return independent of the taxpayers Self-Assessment tax return.
There will be scenarios where there is no capital gain, often because a property benefits from Private Residence Relief (PRR), lettings relief, or the value of the property has not appreciated since acquisition. In these situations, there is no requirement to report the sale but, assessing the availability of any reliefs will be required before confirming that a filing requirement does not exist.
There have been substantive changes to these reliefs which should be considered further: PRR’s final exemption period will be reduced to the final 9 months rather than 18 months from 6th April 2020, and lettings relief requires the homeowner to reside in the property with the tenants to be applicable. Moreover given the upper ceiling for lettings relief, it is still likely that a proportion of the total gain will be chargeable to CGT.
The detail behind the changes from 6th April 2020
From April 2020, Private Residence Relief (PRR) will be restricted. This comes as the latest in a series of restrictions affecting landlords, following on from changes such as the restriction of mortgage interest deductions, as well as numerous others.
PRR is a CGT relief first introduced in the Finance Act 1965 (along with CGT itself) and sought to provide relief for individuals selling their ‘home’. The relief operates by exempting a portion of the gain on disposal for the period in which the property was lived in by the seller. There are also extensions to PRR (such as Private Lettings Relief, see below) that seek to further reduce an individual’s CGT liability.
The new legislation within the Finance Act 2020 seeks to impose two key alterations to PRR as it currently stands:
- Final exemption period reduced from 18 months to 9 months;
- Private Lettings Relief (PLR) abolished except for ‘live-in landlords’.
The reduction/removal of these reliefs may lead to an unexpected yet significant CGT charge being incurred by landlords for disposals post April 2020.
Most individuals will be entitled to full PRR on disposal of their home as it has been their main residence since the date of purchase. For landlords though, this is unlikely to be the case and may raise an issue going forward. For disposals of let properties prior to April 2020, landlords would be entitled to a final exempt period of 18 months, on the basis that the property has qualified as their ‘principal residence’ at some point during their ownership of the property. This final exemption period will be halved for disposals post April 2020, and therefore an extra 9 month period will be in scope for CGT.
The second amendment is in relation to Private Lettings Relief (PLR), and the removal of this relief for the majority of landlords. Landlord’s were previously entitled to the lower of:
- The PRR available;
- The gain relating to the letting period; or
This relief was previously available for any landlords who had let their property to a third-party during their period of ownership. However, post April 2020 this relief will now only be available to landlords who have shared occupation with the tenant during the period of ownership (which is a rarity).
It should be noted that the changes to the final exemption period does not affect the final exemption period for persons who are disabled or resident in a care home.
The combination of these two reliefs previously provided landlords (who have previously resided in the property being disposed of) with significant savings to their CGT exposure upon sale of their properties. Given these rules are shortly coming into effect, giving consideration to the proposed CGT liabilities will allow property sellers to plan and also consider any opportunities to mitigate exposure for example, based on other capital losses arising.
We work alongside our Property team to provide a seamless service to our clients and would be delighted to assist as soon as the particulars of your sale are agreed.
Edwin Coe LLP is a Limited Liability Partnership, registered in England & Wales (No.OC326366). The Firm is authorised and regulated by the Solicitors Regulation Authority. A list of members of the LLP is available for inspection at our registered office address: 2 Stone Buildings, Lincoln’s Inn, London, WC2A 3TH. “Partner” denotes a member of the LLP or an employee or consultant with the equivalent standing.