New capital gains tax rules are coming: are you prepared?

From April 2020, new CGT rules are set to take effect. Nigel May outlines potential problem areas for investors and property sellers.

From 6 April 2020, there will be significant changes to the payment of capital gains tax (CGT) and the reporting of residential property sales to HM Revenue & Customs. These changes were first announced in the 2019 Budget and it is important that sellers understand the implications.

All UK residents will be required to report the sale of residential property, whether in the UK or overseas, to HMRC within 30 days of the completion of sale. A new CGT form will need to be completed, a separate requirement from an individual’s self-assessment tax return.

Within this same 30-day period, a payment on account of the tax due on the sale will need to be paid to HMRC, and this will be treated as a payment on account towards the seller’s overall tax position for the year the property has been sold. The gain will still be recorded on the seller’s tax return and any over or under payment of tax dealt with. 

If tax is overpaid then this won’t be repayable until the tax return is submitted. Interest will be payable by the seller on any additional tax liability not covered by the payment on account. Penalties may also be imposed for non- or inadequate compliance.

Of course, most individuals selling their property will benefit from principal private residence relief, which exempts most gains made on the sale of your only or main residence. However, the period that you have to sell your property, having moved out, is being reduced. For a number of years, the allowed period has been 18 months. This is being halved to just nine months with effect from 6 April 2020.

Furthermore, there has been a relief from CGT where a property that has been your main residence has also been let during your period of ownership. This Lettings Relief exempts up to £40,000 of gains per individual. From the start of the new tax year, this will be available only where the period of letting relates to a period when you rented your property out while living in it at the same time as the tenant.

The rules should operate smoothly in the case of most residential property sales, not least because of principal private residence relief. However, in all cases consideration should be given, prior to completion, to establish whether capital gains tax is payable and the extent of this liability.

Flags for potential problem areas include:

• Where a property (other than your main residence) has been the subject of improvements during your period of ownership. If you are going to claim relief for this expenditure, you should have documentary evidence to back up this claim. Frequently, due to the elapse of time, or invoices not having been retained, this can be problematic.
• Not all property disposals arise on a sale. Many people do not understand that the gift of a property is a disposal for CGT purposes on which CGT is payable (even though no proceeds have been received, it is taxed as a capital gain). It will be reasonably easy for a gift transaction to be missed from a CGT payment on account viewpoint.
• Matrimonial breakdown cases can be potentially problematic where properties are being passed between divorcing spouses after the year of separation (particularly where one has left the matrimonial home).
• Where you own a property with large gardens or grounds, principal private residence relief may be restricted. This will need to be considered in time to identify whether a 30-day payment on account is due.
• Where you own two or more properties that you reside in and sell one, if you haven’t elected to treat one as your main residence, you will need to determine which property was, in fact, your main residence.
• You may own property that is mixed use i.e. a mixture of residential and non-residential use. This is also an important consideration for tax liabilities.

This list is by no means exhaustive; however, these new rules do mean that when you’re going through the process of selling a property, you will now also have to consider the potential demands of the taxman.

Nigel May is a tax partner at MHA MacIntyre Hudson.