Selling your property: Changes to Capital Gains Tax

When it comes to paying tax on residential property, buyers have had to deal with a variety of changes to the tax regime in recent years – and now sellers are having to contend with this too. Up until recently, property owners (particularly investors with buy to let properties) have been able to rely on Private Residence Relief covering the last 18 months of their ownership, in addition to ‘letting relief’ when assessing their Capital Gains Tax (CGT) liability, even where this was payable they had until the end of the tax year to pay this.

However, there have recently been some major changes which could result in a higher tax bill for many property owners.

The new requirements, which came into force on 6^th April 2020, mean that those who are selling a residential property which does not fall within the new exemptions may now have to pay CGT on the sale proceeds of their property, and they will have a limited time in which to pay this.

This article aims to provide a brief summary on the key changes and who will most be affected. We would also strongly advise you to seek specialist tax advice from a tax advisor prior to selling your property, to ensure you are not caught out by these changes.

First of all, what is Capital Gains Tax (CGT)?

CGT is a tax which is payable on the profit made when you sell (or dispose of) something (an asset) which has increased in value. Ultimately, it is the gain you make that’s taxed, not the amount of money you receive.

Individuals are entitled to a tax-free allowance (otherwise known as your Annual Exempt Amount, currently set by the Government at £12,300 per year) and you don’t have to pay CGT if all your gains in a year are under this tax-free allowance.

What are the changes and who will be affected?

Prior to 6^th April 2020, if you sold a residential property which was at one time your main residence but was later rented out, it was possible to deduct ‘letting relief’ for up to £40,000 from any capital gain.

Private Residence Relief (PRR) was available to owners of property which was either your main residence, or had been your main residence during your ownership. In calculating whether this relief applied, tax payers were able to count the last 18 months of their ownership in working out the amount of relief they were entitled to in order to reduce their CGT bill.

Key changes from 6th April 2020:

1. Letting Relief will now only be available if the letting of the property occurred while the owner was living in the property at the same time (such as a lodger).
2. PRR will also now only take into account the last 9 months of ownership (therefore halving the relief) when calculating whether this can be applied to reduce the CGT liability.
3. You will have to pay any CGT within 30 days of completion of the sale, in addition to filing a Return to HMRC.

The impact will be mostly be felt by those who own buy to let properties which they have previously lived in at some point during their ownership, as they will no longer be eligible for Letting Relief.

This will come to a blow for many, especially during the difficult and strange times we are currently facing. This is made worse by the fact that the changes are instant, with no transitional measures in place to streamline the changes, which many will consider both unfair and cut-throat considering letting relief has been around for 40 years.

There are financial penalties and interest to those who do not comply with the changes, and also potentially to those who get it wrong and pay less tax than they should. It is therefore imperative that you get the right advice before proceeding with your sale.

So, putting these changes into context, you may now have to pay CGT when selling the following:

• Your main residence, which has grounds of more than 5,000 square metres (just over an acre);
• Your main residence, which has previously been used as a second home or has previously been let out or been used or partly used exclusively for business purposes;
• Buy to let/investment property;
• Holiday homes/second homes;
• Inherited homes;
• Property which has been transferred as a result of divorce or separation.

What are the exemptions under the new rules?

In order to qualify for PRR, the following circumstances must apply:

• You only have one home and you’ve lived in it as your main home for all the time you’ve owned it;
• You have not let out part of the property (this does not include having a lodger);
• You have not used part of the property for business only;
• The grounds, including all buildings, are less than 5,000 square metres (just over an acre) in total;
• You did not buy the property just to make a gain.

If all of the above apply, then you will not have to pay any CGT on the property sale, or file a return at HMRC and no further action will be required.

If some of the above apply, then you may be eligible for to claim part of PRR and the last 9 months of your ownership will be counted towards calculating any relief you are entitled to.

Will I have to pay Capital Gains Tax?

CGT is calculated on the profit you have made from the sale less any allowable deductions, including estate agents fees, legal fees, surveyor/valuer fees and home improvements. The Government provides a calculator on their website which may provide you with a general indicator on the CGT you may be required to pay.

There are however specific and complex rules concerning how the CGT is calculated in respect of your circumstances, and whether any capital losses made in the same tax year can be applied to reduce the CGT liability.

Therefore, we would strongly advise you to take specialist tax advice to ascertain whether any CGT is due on the sale proceeds of your property before completing your sale, as the consequences of non-compliance are serious and could cost you a great deal financially .

Here to help

We have a dedicated Residential Property team who are here to offer you an exceptional level of service and specialist legal advice with all your property needs.

If you would like more information or have any questions in relation to Capital Gains Tax or any of the above, please call us today on 0113 207 0000.