Sweeping changes are coming to the reporting and payment of capital gains tax (CGT) on the sale of UK residential property; and limits to the extent of the main residence exemption, so advisers and their clients all need to be prepared.
For exchanges on or after 6 April 2020, when a UK residential property is sold and a CGT liability arises, a return must be filed, and a payment on account of the tax due made within 30 days of completion. This applies where the vendor is an individual, trust or estate. The rules also apply to disposals of property where no funds change hands such as gifts, or transfers in and out of a trust and so consideration needs to be given at a very early stage as to how any resulting liabilities are to be calculated and funded.
This is a huge change to the current reporting requirement which is done via the self-assessment tax return system and allows tax to be paid up to 22 months after the sale has taken place.
The reporting of the CGT will in future be done via an online return. Where the taxpayer is within self-assessment the CGT will be treated as a payment on account and the gain still needs to be reported in the self-assessment tax return as well as the 30 day online CGT return. Where the taxpayer is not within self-assessment the CGT return will be a stand-alone online return.
The tax due is calculated based on the information available at the time of the disposal, so any losses which have already crystallised may be offset against the gain. Losses which occur after the gain has arisen cannot be offset until the self-assessment return is filed at the end of the tax year, potentially leading to a long wait for a refund of any tax overpaid on account.
Such a short timeframe in which to complete the return also takes little account of the complexity of many calculations. It may take time to establish cost bases for properties which have been owned for a long time, particularly where improvements have been carried out, and a full fact find will be required where claims for principal private residence (PPR) relief are in point to verify periods of occupation. The changes to the availability of PPR relief taking effect from 6 April 2020 will only add to the possibility for confusion.
The main changes to PPR are the reduction in the final period exemption to 9 months (from 18 months) and restriction in the residential lettings exemption, so that it only applies to shared occupation such as rent-a-room lettings. The residential lettings exemption will no longer apply to third party lets, which will affect anyone who has let their main home for a period whilst they've been living elsewhere. There’s no transitional relief so anyone relying on up to £40K (or £80K) of letting relief will lose this completely from 6 April. The reduction in the final period exemption is likely to impact divorce situations where one spouse or civil partner has moved out of the property in particular.
The moral of the story is to make clients aware of changes as soon as possible and encourage them to start collating information, and contact their tax adviser, as soon as a property is on the market.
Published: March 2020
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March 2020
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