Changes to Capital Gains Tax and the Residential Property Owner
From 6th April, changes to Capital Gains Tax (CGT) came in to force which apply to the disposal of residential properties owned by individuals. Mike Bracegirdle, who specialises in assisting property owners with buy to let portfolios, examines the changes and considers how the impact can be mitigated with forward planning.
Who will be affected?
The persons most likely to be affected by the changes which have come into effect are:
- buy-to-let landlords;
- owners of second homes / holiday homes;
- owners of large properties / landed estates;
- owners who have not always lived in the property;
- Trustees and Personal Representatives if the gain is not entirely exempt from CGT.
The Changes
Previous rule: Letting Relief
If you sold a residential property which was at one point your main residence, but has subsequently been rented out, letting relief of £40,000 was available on any taxable gain. This was available to each owner of the property against their own CGT liability.
New rule
This relief is no longer available unless the owner of the property is in shared occupation with the tenant.
Previous Rule: Private Residence Relief (PRR)
The ‘final tax free period’ of exemption, exempted gains during the last 18 months even if you no longer occupied the property.
New Rule
This relief is now reduced by 50% to 9 months.
(Note, for owners who are registered disabled or are moving out to live in a care home the period of exemption remains at 36 months.)
Previous Rule: Time for filing
CGT was recorded on the individual’s tax return and tax payable on the 31st January following the end of the tax year.
New Rule
A provisional calculation now has to be submitted within 30 days of the completion of a sale and tax paid on that basis. Any underpayments or overpayments will be dealt with following submission of the personal tax return.
Penalties
If you do not file and pay within the 30 days, a late filing penalty will be imposed and interest charged. The late filing penalty increases the later the filing takes place.
How this works in practice
- Mr & Mrs A owns a residential property they purchased for £300,000 in January 2010.
- They lived in the property for 12 years until March 2012 when they bought another property which they moved in to.
- They rented the first property March 2012 until it was sold in March 2020 for £580,000.
| Pre 6th April 2020 | Post 6th April 2020 | |||
| Proceeds of Sale | £580,000 | £580,000 | ||
| Less: Cost | (300,000) | (£300,000) | ||
| Gain | £280,000 | £280,000 | ||
| Less: PRR | £280,000 x 45/123 | (£102,439) | £280,000 x 36/125 | (£80,640) |
| £177,561 | £199,360 | |||
| Less: Letting Relief
|
£40,000 each | (80,000) | ||
| £97,561 | ||||
| Less: Annual exemption
|
£12,000 each | (£24,000) | £12,000 each | (£24,000) |
| Taxable gain | £73,561 | £175,360 | ||
| Tax due assuming both were high rate tax payers |
£20,597 |
£49,101 |
What can be done to mitigate the impact?
- If you are a married couple and the property is in the name of one spouse only, consider transferring the property into joint names. This will maximise the use of available allowances and lower the rate of CGT. Note however if the current owners has a mortgage on the property there will be Stamp Duty Land Tax (SDLT) implications.
- Consider gifting a share of the property to a family members. Again consider the SDLT and Inheritance Tax implications.
- Relief is available for some capital improvement works. Ensure you keep details of work undertaken including all receipts.
- Make sure all information, such as date of acquisition, cost of acquisition, details of improvements made, is available on disposal to avoid overpayment of tax and to ensure that filing occurs within the 30 days.
- For those with larger buy to let portfolio you may contemplate setting up a company and transferring your properties into the same.
If you are contemplating letting out your own house, already own one buy to let property, or are a property speculator with multiple properties, Butcher & Barlow have an experienced team of commercial property lawyers who are happy to discuss your situation, in conjunction with your accountant or financial advisor, to determine the best option in your own specific circumstance.
Mike Bracegirdle
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Butcher & Barlow LLP do not provide financial advice. This article has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax or accounting advice. You should consult your own accountant and / or financial advisors before engaging in any transaction.