Capital Gains Tax
Changes to Capital Gains Tax effective from 6 April 2020
The ownership history of your home is important, because it affects the reliefs available from Capital Gains Tax (CGT) at the time the property is eventually sold.
From 6 April 2020, if you transfer an interest in a property to your spouse or civil partner, your ownership history is transferred too, whether or not the dwelling is your only or main residence at the time.
The two main reliefs available are Principal Private Residence relief (PPRR) and lettings relief.
Under the current PPRR rules, if a homeowner sells their property within 18 months of moving out, they will not be subject to CGT on the disposal of their main home. From 6 April 2020, the exemption period will reduce to just 9 months. If you are moving into a residential care home or you are a disabled homeowner, your exemption period remains unchanged at 36 months.
The second relief is lettings relief. Currently if you let a property you once lived in as your main residence, you may be able to claim lettings relief. In future, this relief will only be available to those who have shared occupancy with a tenant.
One other significant change is the requirement to report and pay the CGT due within 30 days of completion if your sale is not wholly covered by PPRR. Currently CGT is reported and paid by 31 January following the tax year in which the gain was made.
The changes in more detail
Change 1 – transfers between married couples
The general rule for capital gains tax (CGT) is that transfers of assets between married couples and civil partners takes place at no-gain/no-loss. In addition, the Principal Private Residence Relief (PPRR) rules provide that where one spouse makes a transfer of their only or main residence to the other, the receiving spouse inherits the other spouse’s period of ownership of the dwelling even if that period started before marriage. This rule does not however apply to a dwelling which is not their main residence at the time of the transfer. There may be positive or negative effects of a transfer depending on the relevant circumstances.
To make the tax rules consistent, the new rule provide that when a spouse or civil partner transfers an interest in a dwelling to their spouse or civil partner (whether or not the dwelling is their only or main residence at the time), the receiving spouse or civil partner will inherit the transferring spouse or civil partner’s ownership history, including their previous use of the property.
Change 2 – the final period of ownership
Generally, the final period of ownership of a person’s home will be tax-free, irrelevant of whether it is actually occupied as such. The final period exemption will be reduced from 18 months to nine months. The rules which give 36 months relief to those with a disability, and those in or moving into care, will not change.
Change 3 – lettings relief
Lettings relief was introduced to ensure that people could let out spare rooms within their property on a casual basis without losing the benefit of PPRR. The government considers lettings relief extends much further than the original policy intention and also benefits those who let out a whole dwelling that has at some stage been their main residence.
The new rules state that where a gain arises on a person’s home and, at any time in the individual’s period of ownership:
- part of the dwelling-house is the individual’s only or main residence; and
- another part of the dwelling-house is being let out by the individual as residential accommodation otherwise than in the course of a trade or business
then lettings relief may be due.
Effectively, this means that lettings relief will not be available for those periods where an owner has moved out of the property and therefore no longer shares occupation with a tenant or tenants.
Change 4 – need to report and pay tax
In addition to the changes to PPRR, the government is also introducing a reporting requirement on the sale of all UK residential properties. This would include residential investment property and also situations in which the sale of a person’s home is not fully covered by PPRR.
In such situations a special return must be completed within 30 days of completion. In addition, if a person is required to make such a return and, as at the filing date for the return, an amount of tax is notionally chargeable, the person is liable to pay that amount on account on the filing date for the return.
Currently the need to report a capital gain and pay tax on the gain is 31 January following the tax year in which the disposal is made so the new requirements are a significant reduction in timescales.
What to do next?
These changes may be both complex and financially significant, particularly the changes to lettings relief which are effectively retrospective. However, there is time to plan ahead. If you think that any of the changes may apply to you, please get in touch as soon as possible to discuss possible planning opportunities.