From the 6th April 2020 some significant changes will be made to the way capital gains tax (CGT) is calculated and paid on residential property sales.
Capital gains tax payable within 30 days of completion
On 6th April 2020, new rules on the payment of CGT will come into effect. From this date, CGT will be due 30 days following completion of the sale of a residential property. The tax payment will submit a provisional calculation of the gain and pay the estimated tax due.
For some tax payers there will be some difficulty when determining whether they pay tax at 18% or 28% as the income tax band within which the gain will fall may not be known until the end of the tax year.
Ultimately the gain will be recorded on your self assessment return at the end of the year which will adjust for any additional tax that is due or recoverable. Taxpayers have to wait until the submission of their tax return before obtaining a recovery if an over-payment has been made.
CGT – Lettings relief removed
Where a property was at some stage a person’s main residence but also had a period where it was let to a third party, an additional relief is available known as lettings relief. This relief allows up to an additional £40,000 of any eligible gains to be exempt from capital gains tax.
From 6th April 2020 the relief only applies if the letting was undertaken whilst the owner lived in the property at the same time, meaning that many property investors and landlords will no longer qualify for this valuable relief.
Principle private residence relief – reduction in final period of ownership for CGT purposes
Where a property qualifies as you main residence it is not typically subject to CGT on disposal due to the availability of PPR relief. For properties that have qualified as someones principle residence and have also been let out, PPR relief will only apply to the period of principle residence. The qualifying period for PPR relief relief currently includes the last 18 months of ownership, even if you were not living there. After 6th April 2020 this final period is reduced to 9 months, thereby reducing the percentage of the gain that will be exempted under the PPR relief.
What action should I take?
Clearly if you intend to sell your property in 2020 there is significant benefit in considering whether to sell before 6th April 2020 when the new changes take effect. Even if only to benefit from the cashflow advantage of not having to pay HMRC within 30 days of completion.
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