There have been several changes relating to Capital Gains Tax (CGT) over the past few years. The coming years are set to bring more. Here is a summary of some of the more important changes, that might be coming into effect from April 2020.
If you are thinking about selling a residential property in the next year or two, you need to know about proposed changes to the capital gains tax rules for disposals from April 6th 2020.
If you only own one property and have always lived there, you should not be affected. However, if you own more than one property or you moved out of your only property for a period of time, you might face a capital gains tax bill. The two main changes you should be aware of are:
Final period exemption
The last period of ownership counting towards private residence relief will be reduced from 18 months to just 9. Currently, the final period exemption allows individuals a period of grace to sell their home after they have moved out. However, the government feels that individuals with multiple residences have been taking advantage, hence the reduction.
Lettings relief is set to be removed, unless you live in the property with the tenant. For UK property, HMRC must be notified and tax paid 30 days after completion rather than the January following the end of the tax year in which the disposal took place. Failure to pay on time will result in HMRC imposing interest and potential penalties.
With no transitional measures in place, this means that higher-rate taxpayers previously expecting to benefit from the maximum potential relief of £40,000 could be hit with £11,200 extra tax overnight.
Here is an example of how the new taxes could influence a sale:
Steve, a higher rate taxpayer, bought a flat in April 2009 for £100,000. He lived there for 6 years until April 2015 before moving out to live with his partner. He let the flat until 2020 when he sold it for £300,000. The sale was completed on 4th June 2020.
If the contracts were to be exchanged before the April 2020 changes, a CGT of £6,618 would be due. However, after the deadline a CGT of £21,636 would be due, payable seven months earlier – this is due to there being a lower period of private residence relief and a lack of lettings relief.
The next steps
The two above changes are set to be enacted as part of the 2020 Finance Act and at the moment are not definite. The consultation to these steps closed on 5th September 2019. Assuming that draft provisions reach the Finance Bill 2019-20, we will have to see if any changes are made to either after it is debated in Parliament.
25 September 2019
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