Capital Gains Tax Planning for 2020/21

Are you planning to sell any residential property in the coming months?  If so, there are some important capital gains tax changes that are due to come into effect from 6 April 2020 which could have a significant impact on your tax position.

There has been a raft of changes over the past few years that have had a major impact on landlords and those individuals who own second homes.  This includes changes to mortgage interest relief and the introduction of a stamp duty land tax surcharge.

From next year, things are set to change yet again and not for the better!

Private residence relief and lettings relief

When you sell a residential property, any gain that you have made is chargeable under the capital gains tax regime.

Usually, people selling their main or only home are exempt from capital gains tax if private residence relief applies. 

However, there are various conditions that must be met and if you sell a home that you’ve previously lived in and have subsequently let out at some point, you may have to pay some tax on the gain. 

Currently, where the exemption applies, you’ll get full relief for the years you lived in the home as your only or main residence.  In addition, you can obtain relief for the last 18 months you owned it whether you occupied it or not.  These 18 months are known as the final exemption period.

If a property you let out has been your main residence at some stage, you may also be able to claim lettings relief.  This allows you to reduce any chargeable gain remaining after private residence relief, by the lower of:

  • the amount of private residence relief already claimed;
  • the amount of chargeable gain arising during the letting period; or
  • £40,000.

Another major advantage of lettings relief is that it can be claimed by each owner so where you and another individual own the property jointly, you could receive additional capital gains tax relief of up to £80,000.

So what are the changes?

From 6 April 2020, the following changes are due to be implemented:

  • The final exemption period will be reduced from 18 to 9 months.
  • Lettings relief will only be available to those who share occupation of their house with a tenant.

The reduction in the final exemption period is unlikely to cause too much concern but the change to lettings relief will have a major impact, resulting in a potential increase of over £22,000 in the overall tax liability, and in our experience there will now be limited opportunities for this relief to be claimed.

The other major change to capital gains tax relates to the reporting and payment of the liability.  Currently, if you sell a property and make a gain, you’ll need to report it through your self-assessment tax return and pay the liability by 31 January following the tax year of disposal.

From next April the gain will instead need to be reported to HMRC on a residential property return, within 30 days of the completion date, and an estimate of the liability due paid at the same time.

If you are considering selling any properties you should consider the effect that these tax changes might have if you were to sell before or after 6 April 2020.

In some cases, you might find that hanging on for that higher offer could cost you dearly if this means your disposal falls into the next tax year! 

For advice on this or any other property matters contact us today on 01892 507288