Capital gains tax on the sale of residential property: Changes on the horizon

HMRC recently published draft legislation confirming that previously planned changes to capital gains tax will be going ahead from 6 April 2020.

Whilst various changes across the capital gains landscape have been made, the main headline centres around Principal Private Residence (“PPR”) relief, a relief currently available to exempt capital gains on the sale of your main home (or principal private residence) from tax.

When you sell a property which has been your PPR, you have to look at the total period of ownership of the property and whether the property qualified as your PPR for all of that period. PPR relief is available to exempt the proportion of your capital gain on sale relating to the qualifying PPR period and there are certain statutory aspects that you can use when claiming the exemption. One of these relates to the final period of ownership where you might have moved out of the house and into a new home but it has taken a while to sell the old one. At the moment, the last 18 months of ownership is treated as a qualifying PPR period, even if you didn’t live in the house during that time. From 6 April 2020, that automatically qualifying period reduces to just 9 months. This could mean that you have some capital gains tax to pay if it has taken longer than that to sell your house.

Key changes to the administration and payment of capital gains tax are also set to take place. Rather than paying capital gains tax on the disposal of a UK residential property on the 31 January (following the tax year of disposal), you will instead need to create a “residential property return” and pay any outstanding capital gains tax due to HMRC within 30 days of completion (which is very similar to the current regime for non-residents).

For this reason, clients should tell us about any disposals as soon as possible (ideally before the sale goes through) to ensure penalties for late returns and payments are avoided – capital gains sometimes take time to establish, particularly if there is a PPR claim to calculate or a valuation needed to establish your base cost, and 30 days with a strict penalty regime doesn’t allow much time for that.

Important changes to the lettings relief aspect of PPR relief will also take place on 6 April 2020. This is a relief which extends the qualifying PPR period of your house to include periods when it is let to a tenant. At the moment this can include letting the whole house exclusively or just letting part of it and sharing occupation. For disposals on or after 6 April 2020, only periods where you continued to live in the house and share occupation with a tenant will qualify for PPR relief. Unfortunately this will catch people who have already had previous periods of letting out the entire property and thought they would be eligible for lettings relief. The situation will be that if they sell the property before 6 April 2020, the relief will apply. If the sale happens on or after 6 April 2020, it will not be available. If you have a property which has been your home and has also been let out whilst you have owned it and you are thinking of selling it, speak to us as soon as possible as the timing of the sale could have a significant impact on the tax you have to pay on the sale.

If you feel that any of these changes may affect you (especially if you are planning a property sale or are in the process of a disposal), we urge you to get in touch with us as a matter of urgency to discuss your options moving forward.

Please get in touch with our property tax expert, Jonathan Cunningham, using the details below.

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