HM Revenue & Customs have recently published draft legislation in respect of changes that were announced in the 2018 budget.
Principle Private Residence Relief
If you sell a residential property that has been your principle private residence at some point during your period of ownership, part of the gain that you make will be exempt from Capital Gains Tax (CGT). In simple terms, at present the proportion of the gain that will be exempt from CGT is the proportion that relates to your period of residence plus the proportion that relates to your final 18 months of ownership. From 6 April 2020 the final period exemption will reduce from 18 months to 9 months (subject to some special cases which will continue to benefit from a longer final period exemption, such as where an individual has to move out of their home into long term residential care.)
For example:
Sale Prior to 5 April 2020
Period of ownership: 10 years
Period of residence: 3½ years (the property has been rented for the final 6½ years of ownership)
Net capital gain: £100,000
Exempt proportion: 3½ years of residence plus the final 18 months of ownership = 5 years in total
So 5/10ths of the gain is exempt, leaving £50,000 to be taxed. (Subject to Letting Relief – see below.)
Sale After 5 April 2020
Period of ownership: 10 years
Period of residence: 3½ years (the property has been rented for the final 6½ years of ownership)
Net capital gain: £100,000
Exempt proportion: 3½ years of residence plus the final 9 months of ownership = 4¼ years in total
So 4¼/10ths of the gain is exempt, leaving £57,500 to be taxed.
Letting Relief
Letting Relief gives additional relief from CGT when a property is sold that was an individual’s principle private residence prior to being let out. It is a very valuable relief & in the example above would have reduced the pre-5 April 2020 taxable gain of £50,000 to £10,000 for an individual seller, or nil if the sale was in joint names & both individuals had lived in the property prior to renting it out.
With effect from 6 April 2020 Letting Relief will only be available if the property owner is in shared occupancy with the tenant.
This is a huge change & could result in a much larger CGT bill for a property sold after 5 April 2020.
You should also be aware that if you sell a UK residential property on or after 6 April 2020 then, unless the gain is fully covered by principle private residence relief, a return must be made to HM Revenue & Customs and any CGT must be paid within 30 days of the date of completion. Mitchells will be happy to assist with this if required.
If you are considering selling an investment property & you think that you might be affected by these changes please do not hesitate to contact a member of our tax team by calling 01246 274121 (Option 2) or emailing taxteam@mitchellsaccountants.co.uk