Budget 2018 delivered by Chancellor Philip Hammond confirmed some significant changes to the taxation of property disposals by individuals. In essence, there will be additional reporting requirements out with the usual Self Assessment tax return and further restrictions are to be imposed on the availability of Capital Gains Tax (CGT) reliefs. A summary of the proposals are below.
UK residents – Residential Property Disposals
From 6 April 2020, gains subject to tax and realised by UK residents on UK residential properties will need to be reported to HMRC, along with a payment on account of the tax due, within 30 days of completion. In calculating the payment account to be paid, only losses which arise on other assets prior to the disposal of the residential property may be considered. The timing of a sale of any residential property will therefore need to be given even closer attention.
This is a major change and one which may cause problems for the ill-prepared property owner. Aside from the clear cash flow disadvantage to the taxpayer, CGT computations are often complex and there is an additional administrative burden in completing the actual report to HMRC. The 30 day deadline is therefore very short indeed to ensure the taxpayer remains compliant to avoid exposure to penalties.
To illustrate the potential issues, take Mr Smith (a higher rate taxpayer) who sells his UK rental property on 1 May 2020 at a gain of £50,000, followed by a sale of quoted shares at a loss of £50,000 the following day. He has already exhausted his CGT annual exemption for the year. Under the proposed changes, Mr Smith will be required to report the property disposal and pay £14,000 (28% of the gain based on current rates) to HMRC by 31 May 2020. Relief for the losses on the quoted shares cannot be claimed until after the 2020/21 tax year i.e. 6 April 2021 at the very earliest.
Taxpayers could therefore find themselves overpaying tax with no access to a repayment claim for many months (up to 21 months in the most extreme cases).
Non UK residents – Commercial Property Disposals
Non UK residents have been subjected to similar rules as those described above for the sale of residential property since 6 April 2015. However, changes to be introduced from 6 April 2019 will mean that non UK residents will also have to report commercial property disposals within 30 days and pay any tax due within the same timeframe.
Principal Private Residence (PPR) Relief
Provided that the owner of a UK residential property has used that property as their main residence at some stage during ownership, PPR relief is available to reduce the gain arising on sale.
Full PPR relief is given where individual disposes of their main residence which has been used as such throughout the ownership period (subject to concessions for certain periods of absence which are treated as periods of deemed occupation).
Currently, all property owners can claim PPR relief for gains realised in the last 18 months of ownership. However, this period will reduce to 9 months as from 6 April 2020. It should be noted that this change will not affect the 36 month final period exemption available to those who are disabled or in a care home.
Letting Relief is available where a former main residence has been rented out during a period of absence which does not qualify for PPR relief (perhaps whilst trying to sell the property).
Under current rules, Letting Relief is deducted from the capital gain arising and is given at the lower of:
- The gain arising during the period the property was let;
- The total PPR relief claimed on the disposal; or
From 6 April 2020, Letting Relief will only be available for periods where both the owner and the tenant shared occupancy of the property. Property owners may therefore consider selling their property before the change comes into force to preserve their entitlement to, potentially, a £40,000 reduction in their chargeable gain, as well as PPR relief for the last 18 months of ownership.
If you would like to discuss the upcoming changes and how AAB can help, please get in touch with Lynn Gracie (firstname.lastname@example.org) or your usual AAB contact.
To find out more about Lynn and our Private Client team, click here.