Over the last few years the government has introduced various changes to the taxation of UK property, many of which have been targeted at residential landlords and owners of second homes. In keeping with this, further changes are due to take effect from 6 April 2020. In this article we take a look at these changes and the likely impact they will have.
Changes to Private Residence Relief
Generally, individuals will not pay UK capital gains tax (CGT) when they sell their only or main residence, as any gain is covered by Private Residence Relief (PRR). PRR exempts any element of the chargeable gain that is attributable to either a period of actual or ‘deemed’ occupation of the property.
Deemed occupation is a period of ownership where the owner is not physically occupying the property but for PRR purposes is treated as living there. Currently, periods of absence are ‘deemed’ periods of occupancy if any of the following apply:
- Absence of up to 36 months (for any reason), provided the homeowner returns to the property;
- Absences during which the homeowner is in employment and all their duties are carried out overseas;
- Absences of up to four years in total, where the homeowner’s work, either as an employee or as a self-employed trader, requires them to live elsewhere in order to perform the job effectively.
In addition, the final 18 months of ownership are currently treated as a ‘deemed’ period of occupancy, provided the individual has physically occupied the property at some point during their ownership. This is intended to give homeowners a CGT-free period in which to sell their property after leaving it, should they not be able to do so before moving into a new main residence.
Draft legislation included in the 2019 Finance Bill reduces the period of deemed occupation from 18 months to nine months. Assuming the change is adopted, it will take effect for property disposals on or after 6 April 2020. For those affected, it will increase the proportion of the gain which remains chargeable to CGT.
Removal of Lettings Relief
Under current legislation, where a property qualifies for PRR and has also been let out at some point during ownership, the homeowner may be entitled to Lettings Relief. Lettings Relief reduces the chargeable gain by the lowest of:
- The amount of PRR already calculated;
- £40,000; and
- The gain attributable to the let period.
Lettings Relief is available per individual, so if a couple disposes of a jointly-owned property, relief of up to £80,000 can apply to reduce the chargeable gain on disposal.
From 6 April 2020, Lettings Relief will only be given where an owner is in shared occupancy with a tenant. This effectively removes Lettings Relief for individuals who have vacated a property previously occupied as their main residence, in order to let it out. Such individuals may ultimately see an increase of up to £40,000 in their chargeable gains on a future sale.
Individuals who are proposing to sell a property that currently qualifies for Lettings Relief, but will not after 5 April 2020, may wish to consider bringing forward the disposal date where this is commercially viable. By doing this they may be able to save up to £11,200 of CGT.
Changes to capital gains tax reporting deadlines
Currently, CGT due on disposals of UK residential property by UK residents is payable by 31 January following the end of the tax year of disposal. New rules due to take effect from 6 April 2020 will significantly reduce the CGT reporting window for such disposals.
Under the new rules, CGT in respect of UK residential property will need to be paid and reported on a ‘residential property return’ within 30 days of completion. HMRC will accept a return based on estimated figures if it is not possible to obtain accurate figures by the due date, but if the deadline is missed, interest and penalties will be charged.
Taxpayers who are within the self-assessment system will also have to report the capital gain in their annual tax return. Any adjustments to the figures reported on the residential property return will be made at this time.
If a disposal is fully covered by PRR, or is otherwise not taxable, no return will be required. The changes are therefore likely to affect mainly those disposing of second homes or rental properties. It will be advisable for such people to start collating the information required for the CGT calculation before the property is marketed.
Other recent changes
There are several other recent changes that demonstrate the government’s determination to tighten up the regime for property taxation:
- Since 6 April 2017 relief for interest and finance costs incurred in residential property businesses has been restricted. The restriction has been phased in over a four-year period, but from 2020-21 tax relief will be limited to the basic rate of income tax (20%).
- The time limit for purchasers to file a Stamp Duty Land Tax (SDLT) return and pay the tax due was reduced from 30 days to 14 days for disposals taking place from 1 March 2019. HM Revenue & Customs (HMRC) has advised that even before the change, most SDLT returns were being filed within 14 days, so the shorter time limit is not expected to have a significant impact.
- In April 2016 HMRC introduced an SDLT surcharge for individuals purchasing a new property when they already own a property. Such people now pay an additional 3% on top of the normal SDLT rates. Relief is usually available where an individual is replacing their main residence but there is a period when they still own two properties.
Assistant Manager – Personal Tax