From April 2020, new rules for Capital Gains Tax (CGT) are set to come into place for landlords and those with additional properties in the UK, but are you aware of them?
Currently, CGT is paid after submitting your Self Assessment tax return, no matter how the CGT is incurred. From April 2020 landlords (or those with an additional property) who sell and incur a CGT liability must pay the full amount of CGT owed within 30 days of the completion of the sale.
The rates of CGT will remain the same; for a residential property these are 18% for a basic rate tax payer and 28% for higher and additional rate tax payers. If however, for a basic rate, or even a non-tax payer, the gain is excessive enough to push an individual into higher rates of tax, then the portion of the gain that is within their basic rate band would be taxed at 18% and the remainder at 28%. The annual CGT exemption of £12,000 each can be applied still.
Therefore, people who are selling to realise profit must factor in the payment of CGT that will be owed shortly after completion, as failure to make the payment owed within the 30 days will lead to penalties.
A return must be completed and individuals must calculate whether any CGT is due, taking into account their annual exemption for the year and carrying forward unused losses. Individuals must also apply the correct CGT rate, either 18% or 28%, or a combination of both.
At the end of the tax year, a Self Assessment return must be completed, detailing total income and include the gain realised on the property. The true amount of CGT due will be ascertained and any repayments made or further CGT owed will be collected.
The 30 day period starts at the date of disposal. A return is not required where there is no CGT due, including where a gain is realised but is within the CGT exemption, or a loss has been realised.
At present, no detail has been provided by HMRC as to how to report this gain, but we will be monitoring this. Further detail is expected before the changes are implemented on 6th April 2020.
Private Residence Relief (PRR)
Currently, anyone who sells their main residence and lived in it throughout the period of ownership doesn’t have to pay CGT on any profits realised. To an extent, this relief applies to people who sell a rental property that used to be their former main residence. The relief is applied to the period the resided in the property as well as the final 18 months of ownership, regardless of whether the property is rented out or not in this final period. You therefore need to calculate what proportion of time the property was your main residence to obtain this relief.
The intention in doing so is to give you longer to sell a property after moving out before you are eligible to pay CGT. From April 2020, this 18 month period will be halved to 9 months.
If you qualify for Private Residence Relief, at present you may also qualify for Letting Relief, meaning less, or no CGT is incurred. Letting relief only applies where, at some point during the period of ownership, the property has been let out as residential accommodation. The relief applies where:
- A gain will be realised and Private Residence Relief is available;
- Part or all of the property has been let out as residential accommodation during the period of ownership;
- A gain has arisen due to the property being let out (no longer being a main residence).
Under the new rules, the changes to this relief mean it would only apply to the period of time where the owner(s) occupied the property with the tenants at the same time.
The relief will still be applicable in some cases, but on the whole, it is expected that claims for this relief will be significantly fewer.
There are costs that can be deducted upon the sale of a property, such as Stamp Duty Land Tax paid on purchase, estate agent fees, solicitors fees, improvement costs made during the period of ownership. All of these will help to reduce the realised profit and thus, the potential CGT liability.
The liquidity should not be an issue, as after the sale investors should receive the proceeds. It would be prudent to therefore settle any CGT liabilities before deciding what to do with the capital.
As calculations must be made, individuals should tell their adviser or accountant immediately after the sale to ensure the calculation is undertaken correctly. It may even be beneficial to provide forewarning so that calculations can be prepared, with minor adjustments made upon the sale completion.