Capital Gains Tax on a Residential Property
New HMRC laws regarding how Capital Gains Tax is reported and paid when disposing of a (residential) property could potentially lead to property chains collapsing. We believe that it is important that the following understand the issues that can arise:
- Estate Agents
From 6 April 2020 it will be vitally important for sellers of properties to understand their potential tax liabilities before going through the house buying process. They may also wish to ensure that the buyers are fully aware of the new rules to prevent chain collapses.
Many people often stretch themselves to the limit of what they can afford. Having to find thousands of pounds extra to pay for unknown tax liabilities could be unachievable. Failure to understand the tax due could lead to cash issues and ultimately collapsed sales. Further down this article we show an example of this.
Why is this Important?
- Buyers – if you have an unexpected large tax bill, you may not have the necessary resources to meet this. This could put you in a financial predicament and miss out on your dream home.
- Sellers – if your buyer cannot afford to purchase your property due to lack of available cash, this may mean you miss out on your dream home.
- Estate Agents – you could miss out on sales, delaying income and your client may feel they have lacked a quality service. This could lead to loss of future dealings.
- Solicitors – if you do not advise your clients that potential tax liabilities could fall due before contracts exchange, (handling the sale) your client make seek a professional indemnity claim.
New Capital Gains Tax on Residential Property Rules
From 6 April 2020 if you have exchanged and completed on or after this date, you may have:
- Capital Gains Tax to pay within 60 days of the completion date
- To report this sale to HMRC within 60 days
Please note from the 27 October 2021 (this changed to 60 days from 30 days).
Failure to report this will result in:
- A penalty
- Late payment interest and potential surcharges
What is Capital Gains Tax?
Capital Gains Tax (CGT) is a tax on the “profit” when you sell (or “dispose of”) an asset that has increased in value.
The Capital Gains Tax rates depend on your personal Income. Simplistically, after your Annual Exemption amount, gains falling in your basic rate band are taxed at 18% and the element of the gains falling above this are taxed at 28%.
Who will need to report the Capital Gains Tax within 60 days?
You may need to submit a Capital Gains Tax report and make payment when you sell or dispose of an interest in a:
- Property that you have not used exclusively as your main home
- Rental property
- Property that you have inherited and have not used as a main home
- Holiday home in the UK
As mentioned before CGT depends on your income, but it also depends on your “future” gains in a tax year. This means that these declaration can only ever be estimates at the time. You will still need to declare the Gain and tax already paid again on a Self-Assessment Tax Return, because you may have over or under paid your tax within the 60 day period.
Who won’t have to make a CGT report and make a payment?
Just because you sell a house does not always mean you will need to make a declaration within the 60 day period, for example when:
- An exchange of contracts (legally binding contract for sale) is made before 6 April 2020
- You qualify for Principal Private Residence Relief
- A sale made between a spouse or civil partner (deemed a no gain no loss transfer – although Stamp Duty Land Tax could apply)
- The gains (incl. other residential property gains in the same tax year) are within your tax free allowance known as the Annual Exemption
- You sold a property at a loss – note you would want to record this on a Self-Assessment Tax Return
- The property is outside the UK – note this may still need to go on a Self-Assessment Tax Return
What is Principle Private Residence Relief?
Principle Private Residence (PPR) Relief exempts all or part of a Capital Gain that arises on a property which an individual has used as his home. In practice most people will buy a house, live in this throughout, before selling it, so these individuals will not need to worry about the rules.
Complications arise when you may have:
- A 2nd home
- Extensive grounds
- Let out the property for a period of time
- Buying a property but not moving into this straightaway. For example renovations were undertaken or the property was being built
- Moved overseas for employment
- Worked elsewhere in the UK
There are reliefs in certain circumstances, so taking advice sometimes 1 to 2 years before selling a property can save thousands of Pounds.
Have there been any changes to Principle Private Residence Relief?
Yes, PPR used to be automatic for the last 18 months of ownership irrespective to how the property had been used, but from 6 April 2020 this is being reduced to just 9 months.
What about Lettings Relief?
Lettings Relief was a relief, whereby if you had rented out a property at some stage, but had also lived in the property as your Main Residence for another period of time (of quality) you were entitled to claim this relief. This is being modified on 6 April 2020.
The re-branding of the new Letting Relief rules only provides you relief if you are living with the tenant/lodger, so effectively those using the rent-a-room scheme.
- A purchase of a house with your spouse for £250k (incl. all costs) on 01/05/10.
- You immediately let on 01/05/10 to 30/04/15 – 5 years.
- You moved in on 01/05/15 and sold it on 30/04/20 for £458k (incl. all costs) – 5 years.
Under the old rules you Capital Gain would have been £0.
Under the new rules you suddenly have a Capital Gain of £80k at potentially 28% = which could cost £22,400 in tax. (This is after using 2 Annual Exemptions)
Non-Resident Capital Gains Tax
Since 6 April 2015 Non-Residents have faced Capital Gains Tax (CGT) on the disposal of Residential Property. Non-Residents have also had to report any CGT owed within 60 days of completion.
This was extended on 6 April 2019 with Non-Residents being required to report any sales or disposals of any UK land and property.
- Residential properties (from 6 April 2015)
- Non-Residential properties (from 6 April 2019)
- Indirect disposals (from 6 April 2019)
Another thing to note is that the payment deadline is being brought forward. Previously you could delay the payment to 31 January after the end of the tax year. Now you will also need to pay CGT within 60 days of completion from 6 April 2020.
Non-Residents have 3 different calculation methods3 different calculation methods for Residential property and can choose which produces the best result. These are:
- using the market value at 5 April 2015
- by working out the gain over the whole period (the date the property was acquired to the date it was disposed of) and then working out what the gain since 5 April 2015 is as a proportion – known as time apportionment
- by working out the gain over the whole period
For non-residential property the default method will be to rebase (re-value) this at 5 April 2019.
Trusts Capital Gains Tax
These rules follow the UK and Non-UK Resident Rules.
If you represent a Trust for a UK Resident who disposes of a UK Residential Property you must report and pay the Capital Gains Tax within 60 days.
If you represent a Trust for a non-UK Resident who disposes of a Residential, Commercial Property or indirect disposal you must report and pay the Capital Gains Tax within 60 days.
With tax it is always advisable if possible to obtain advise before making a decision. If you require assistance with making the necessary declarations and/or calculations please contact us. Our experienced accountants will be happy to help.