Capital gains on residential property
Recent years have seen a number of changes to tax rules to increase government tax revenue from buy to let landlords. Stamp duty has been increased markedly and mortgage interest relief has now been restricted, albeit only taking full effect from April 2020.
The government continues to see residential property as an area where more tax can be collected. The focus now is on capital gains tax. There are two proposed tax increases and an earlier payment date due to take effect from April 2020.
Timing is crucial
Capital gains tax is currently due on 31 January in the tax year following the sale of the property. So for a sale in March 2020 (in the 2019/20 tax year), the tax on any profit is due on 31 January 2021. But for contracts exchanged on or after 6 April 2020, capital gains tax will be due 30 days after disposal. In other words, delaying a sale by a day from 5 April to 6 April 2020 brings forward the tax due date by nearly 9 months from 31 January 2021 to 5 May 2020.
Higher capital gains tax bills from 6 April
In addition to the changes to timings that will affect cash flow, there are two other fundamental changes that could impact your tax liability. These tax rises affect properties which have at some point during ownership been a principal private residence (PPR). Currently if a property has been a PPR for part, but not all of your ownership, the gain arising in the last 18 months is exempt from capital gains tax. This period is now being reduced to 9 months for disposals taking place on or after 6 April 2020. Please do be aware of this change to avoid losing a valuable tax break due to the timings of your disposal.
Furthermore, if a property has at some point been your PPR and at other times has been let out, ‘lettings relief’ currently exempts up to £40,000 of gain from capital gains tax. From April next year, ‘lettings relief’ is only available if the owner lived in the property during the period of letting (i.e. it will cover lodgers but not letting of the whole property). Those who find themselves in the scenario described here could be liable for an additional £11,200 tax bill if sold on or after 6 April.
Retain or sell?
In conclusion, anyone who is thinking of disposing of a let property, particularly one which they have lived in previously, should seriously consider whether they should market the property in the very near future in the hope of achieving a sale before 5 April 2020.