Changes to legislation from 6 April 2020 – residential property

Further to my article on the draft finance bill 2019.

HMRC are now set to introduce several legislative changes from 6 April 2020.  These new rules impose strict 30 day reporting and tax payment deadlines on the disposal of properties which will be subject to Capital Gains Tax ('CGT'), previous tax reliefs have been abolished and the availability of Private Residence Relief ('PRR') has been further restricted.

Who is likely to be affected?

The persons most likely to be affected by the change will be:

  • buy-to-let landlords;
  • owners of second homes / holiday homes;
  • owners of large properties / landed estates;
  • owners who have not always lived in the property

In addition, trustees and personal representatives of deceased persons who sell or otherwise dispose of residential property where the gain is not entirely exempt from CGT.

However, no reporting or payment will be necessary where a UK resident disposing of a residential property is in a nil gain / nil loss position or if you are selling a private residence that you have always occupied.

What are the main changes?

The table below sets out a comparison of the existing rules versus the new rules coming into effect from 6 April 2020.

  Current rule (pre 6 April 2020) New rule ( 6 April 2020 and onwards)
Reporting and payment dates

Capital gains on property are reported via a Self-Assessment tax return which is completed after the end of the tax year in which the property is sold. This is due to be submitted to HMRC by 31 January following the tax year end. Payment is also due by 31 January following the end of the tax year.

If the disposal is liable to CGT, HMRC will expect a 'residential property return' to be made outside of the usual self-assessment system which is due 30 days following completion of the sale. Payment of any CGT is also due within 30 days. Taxpayers who are within Self-Assessment will also need to capture the disposal on their tax return as well.

Lettings Relief Lettings relief of up to £40,000 per owner (i.e. £80,000 per couple) is available where the property has been rented out at some point during the period of ownership (but not for the whole period). 

No lettings relief will be offered unless the owner of the property was living at the property with their tenant. This means that lettings relief has effectively been abolished (if you are living at the property and sharing it with the tenant, you will likely be entitled to PRR in preference to lettings relief). Lettings relief accrued before the new rules come into force will be lost.

Private Residence Relief (PRR) PRR is granted as an exemption to CGT for the last 18 months of ownership even where the owner has not occupied the property during this period.

PRR for the final period will be halved and only apply for the last 9 months of ownership. This will not affect the 36 month exemption where owners have had to leave their main residence due to disability or if they are moving into a care home.

Landlords should also be reminded that from 6 April 2020, the final stage of the phased removal of mortgage interest relief will come into effect, as per my previous article here

What are the penalties for getting it wrong?

You’ll get a late filing penalty and be charged interest if you do not submit a residential property return and make payment of CGT by the 30 day deadline.

If you miss the deadline by:

  • up to 6 months, you will get a penalty of £100
  • more than 6 months, a further penalty of £300 or 5% of any tax due, whichever is greater
  • more than 12 months, a further penalty of £300 or 5% of any tax due, whichever is greater

If you have to pay any CGT within the same 30 day period, late payment penalties and interest may also be due if you miss the deadline.

If any CGT remains unpaid after 31 January after the end of the tax year of the disposal, a late payment penalty of 5% of the tax outstanding will be charged.

How can I be prepared for the rule changes?

  • You may want to consider bringing forward your decision to sell / gift your property before 6 April 2020 to benefit from the current rules (please note exchange of contracts will need to take place prior to 6 April 2020 for the disposal to fall under the 'old' rules)
     
  • If you are married and the property is currently in one of your names, you could transfer the property into joint names to potentially reduce the overall CGT liability by utilising your spouse's tax free annual exempt amount and a lower rate of CGT if they have some of their basic rate tax band available.
     
  • More than ever, relief for the cost of capital improvement works undertaken at the property will be of value when calculating the chargeable gain arising on a qualifying property. Therefore, it is important that you discuss with a tax adviser which costs will be allowable for this purpose.

 

  • If you are aware that there will be a gain on your property, having all the relevant information to hand such as when the property was acquired, the acquisition cost (including stamp duty) and details of any improvements made over the period of ownership will be beneficial in order to meet the 30 day time limit. In some cases, professional valuations may be needed.

The changes to capital gains tax that will be introduced from April 2020 will significantly impact landlords and those who own second homes. If you’re unsure how the new rules might affect you, getting help from a tax adviser will help you to ensure you comply with the new rules and pay the right amount of tax.

We have an experienced tax team who can advise on all aspects of tax on property, as well as a residential conveyancing team to assist with the sale of any property. If you would like to discuss this or any other tax issues, then please get in touch.