Changes to capital gains tax on sale of properties

HMRC have finally given more detail of the forthcoming changes to capital gains tax (CGT) on the sale of residential properties. These are amongst the most significant changes to this area of taxation for many years and are likeky to lead to significantly increased tax liabilities for many individuals selling properties that have not always been their sole UK residence.

As well as changes in available reliefs, there is also a major change in the timing of the payment of CGT.  This potentially affects the sale of residential properties (including buy-to-let properties) by many individuals and trustees as, where CGT is due, it will be payable within 30 days of sale.

All these changes come into force for disposals after 5 April 2020

Main Residence Relief

In most cases owner-occupiers do not pay capital gains tax when they sell their home because of a relief which effectively exempts the seller from tax in relation to periods when they lived in the property (Main Residence Relief). If you have always lived in the property as your Main Residence this relief is unchanged and any gain on sale should still be tax-free.

However, if you are selling a property which you have not occupied as your Main Residence throughout, there are two changes to existing reliefs which could affect your CGT position on sale and lead to a significant increase in CGT liability on the sale of properties that have not always been the sole residence of the seller, for example rental properties.

Period of Grace reduced from 18 months to 9 months

There is a “period of grace” which is designed to allow for the situation where a homeowner moves into their new home before they have managed to sell the old one. Effectively, the period of grace is a treated as period of Main Residence, even if you are not living in the property at the time (eg because you have another property, or perhaps because you are renting out the old property). This period is currently 18 months, but will be cut to 9 months from 6 April 2020. 

Lettings Relief withdrawn in most circumstances

There will also be changes to “lettings relief”: this will be severely restricted as from 6 April 2020.

This relief currently reduces a capital gain by up to £40,000 (ie a potential tax saving of up to £11,200) where the property owner has lived in a property themselves at some stage and has rented it out at other times. 

For sales on or after 6 April 2020, lettings relief can only be claimed if the owner and tenant have lived in the property simultaneously: this situation is likely to be quite rare. 

Payment of CGT accelerated to within 30 days of sale

Perhaps the more significant change is to the timing of capital gains tax payments following the sale of a residential property. At the moment, CGT is payable via the Self Assessment tax return, so there is a delay of between 10 and 22 months after a sale before the tax is payable, (depending on when in the tax year the sale takes place). 

For sales of residential property taking place after 6 April 2020, HMRC must be advised of any taxable gain within 30 days of completion and an estimated tax payment must be made within the same timescale. This already applies where a residential property is sold by a non-UK resident and is now being extended to UK residents as well.