Capital Gains on Residential Property

The Government has been reforming the tax system in the last few years to make investment in residential property less attractive. Actions have included increasing Stamp Duty Land Tax (mirrored in Scotland and Wales) and reducing tax relief for mortgage interest. 

The following changes also came into force from 6^th April this year:

30 Days to submit a tax return and to pay the Capital Gains Tax (“CGT”)

Perhaps the most significant change is that, for UK residential property disposals made after 6^th April 2020, a Residential Property Return (“RPR”) will need to be submitted and the CGT liability paid to HM Revenue and Customs (“HMRC”) within 30 days of completion – not exchange. Penalties and interest will be charged for late RPR and CGT payments. By having to make the payment within such a short space of time could also impact any other plans you may have had, especially if you had earmarked the proceeds for another purpose.

Due to COVID-19, the Government have introduced a period of grace and late filing penalties for any transactions completed between 6 April 2020 and 1 July 2020 will not be incurred as long as the RPR is submitted by 31 July 2020.

Please be aware that transactions such as gifting UK property to a connected person or Trust and the division of assets as part of a divorce settlement may also be deemed disposals requiring disclosure on an RPR. This will also apply when trustees dispose of UK residential property held in a UK resident Trust and there could be additional delays if the Trust has not previously been registered with HMRC in trying to meet the 30-day deadline.

An RPR will still need to be submitted even if you complete an annual Self-Assessment tax return and there are only a few instances where there is an exemption to complete an RPR, such as selling a property which has always been your only or main residence.

We would recommend seeking advice when you sell a property, even if it is your main residence.

Reducing Principal Private Residence (“PPR”) Relief

PPR Relief enables a proportion of the capital gain on the sale of the property to be exempt from CGT when it was your only or main residence.  Therefore, if you lived in your home from the day of purchase to the date of sale, it is likely that the gain would not be subject to CGT.

In addition to the period when you lived in the property as your only or main residence, under the previous rules, the final 18 months of ownership also qualified for PPR Relief irrespective of what the property has been used for during this time period. This was introduced to help in the circumstances where a person was unable to sell their previous home straight away.

This final 18-month period has been halved to just 9 months from 6th April 2020, therefore increasing the amount of the capital gain which may be subject to CGT. Halving this time period is likely to increase the CGT liability on any property disposals which had previously been your residence.

Restricting Lettings Relief

This is an additional relief which exempts up to £40,000 of gain from CGT, resulting in a CGT saving of up to £11,200, where a property has been your only or main residence and has also been rented out.

From April 2020, Lettings Relief has been severely restricted and will only be available for periods where you, as the landlord, lived in the property with your tenant. As a result, the amount of Lettings Relief will, in most cases, not be available at all.

The above changes the Government have made are going to have a significant impact on the timing of the payment of CGT and increase the amount payable.