There are three big changes coming in the capital gains tax (CGT) treatment of residential property and you should consider whether it is to your benefit to bring forward a sale or gift so that you can take advantage of the current rules.
From April 2020, it is proposed that:
- The final ownership period which automatically qualifies for main residence relief (PPR) will be reduced from 18 to 9 months. Disabled people retain their current exemption of 36 months. (this change only affects those who have not lived in the property as their main residence in the 18 months immediately before a sale);
- Within 30 days of the sale, you will be required to file a CGT Return and pay an estimate of the Capital Gains Tax due;
- Let Property Relief will be substantially restricted.
Whilst the new pay-and-file-within-30-days requirement (bringing UK resident property sellers into line with non-UK sellers) is likely to only cause a cashflow advantage to the government and a disadvantage to those who need all of the funds to facilitate the next property purchase, there is a risk that too much or too little tax will be paid at the time. Capital Gains are assessed on top of your total income which you may not know until after the end of the tax year – possibly almost a year after the sale takes place. You will have to estimate your tax position within those 30 days. If your income suddenly increases later in the year you may end up into the higher rates of tax forcing the gain to be assessed at 28%. Alternatively, you could assume that you were going to be in the 28% CGT band, but later in the year suffer a large capital loss making the early tax payment superfluous.
But it is the proposals surrounding the Let Property Relief that could prove to be the most valuable relief to be lost. At present, if you let a property that had previously been your main home (and qualifies in part for PPR), you can claim Let Property Relief of up to £40,000 per owner in addition to any PPR relief. For example, you buy a house for £80,000 and live in it for 7 years before moving away to another part of the country. You keep the property for a further 13 years and become an “accidental landlord” before selling it for £220,000 and a profit of £140,000. Currently the last 18 months of ownership will qualify for PPR and so the proportion of the gain that is exempt under PPR is (7+1½)/20 x £140,000 i.e. £59,500. Additionally, as you had previously used the house as your main residence, you can claim the Let Property Relief of a further £40,000. The £140,000 gain is therefore reduced to £40,500 on which Capital Gains Tax is assessed at a maximum of 28%.
From April 2020, assuming the proposed changes are enacted, in addition to the final qualifying period halving again to only 9 months (increasing the gain in this example by a further £5,250), it is proposed that Let Property Relief will only be available for periods that you had been resident in the same property at the same time that it had been let and in the above example, the £40,000 relief will not be available. From April 2020, the overall assessable gain in our example is now increased to £85,750 from £40,500 (a maximum increase in CGT of £12,670). The increase is even greater if the house were owned by a married couple, each currently entitled to £40,000 Let Property Relief.
Whilst the proposed restriction that you have to be living in the property at the same time as you are letting may seem strange, these proposals merely follow the same treatment for non-residential use. If you live in a house but use one quarter of it exclusively for business, your PPR relief is restricted by that fraction as you are not using that part of your home as a home, but for business. The same theory works for lodgers. If you have a lodger – for example in a “Granny-Annex” that you do not use, that part of the property is not being used as your home. These proposals allow additional CGT relief to cover the Granny Annex in these circumstances.
The Capital Gains Tax treatment for these reliefs is the same whether you are selling a residential property or gifting it. The only difference of course is that with a sale you receive money with which to pay the tax. With a gift to an individual, you have to find the funds to pay the taxman.
What can I do?
For those who face losing the valuable Let Property Relief – as well as seeing their PPR relief curtailed to only 9 months if they are living away from the property at the time of sale – there is effectively one option available. If you are looking to sell in the future, calculate by how much your potential capital gains tax bill will increase as a result of these measures and if substantial enough, look to sell early. Depending on your circumstances, you may even be better off by accepting a slightly lower offer in return for a quick sale enabling you to sell before these reliefs are lost, or otherwise bring forward a gift or disposal in order to “bank” any relief.
Time is running out before these proposals are due to come into effect. By looking at your potential Capital Gains Tax position now, and by bringing forward any potential property disposals, you could still make best use of these reliefs.