Capital gains tax needs to be paid when second homes and buy-to-let properties are sold. On 6 April 2020, new capital gains tax for property rules began, which apply to all sales of UK private residential properties by UK residents. To help you understand the significant impact these changes could have on the amount of tax you need to pay, we have compiled this informative guide.
Principal private residence status
Previously, a final period exemption was applicable and meant that owners were not liable to pay capital gains tax for the last 18 months of ownership, even if the property was not the principal residence. This provided protection to those who were moving to a new home if the previous home was taking some time to sell. However, since April 2020, this period has been reduced to 9 months. Although, there is an exemption for those who are moving into a care home and those with a registered disability.
Before 6 April 2020, lettings relief was available up to a maximum of £40,000 for a single owner, or £80,000 for joint couple owners. This applied if the owners were letting all, or part of a property which was considered the main residence or formally considered the main residence. However, the rule changes mean this is only available when the occupation of the property is shared with a tenant.
Payment of capital gains tax
There has been a major change to the deadlines which apply when paying capital gains tax. These new deadlines may apply when an inherited property, a second home, or a rental property is disposed of or sold. The new rules mean that following completion, there is a 30-day window to calculate, file and pay the capital gains tax bill. Currently, the payment is required by 31 January in the tax year which follows the year of the property sale.
In reality, the tax may be calculated based on a rate of 28%, however, some of this may fall into the 18% tax category. This would not be known until the tax return has been filed, but adjustments can be made after the report is completed. Ultimately, a provisional gain will be recorded on the tax return and any overpayment or underpayment will be payable once the return is finalised by HMRC.
There are some situations where you may not have to file a report and make a payment within 30 days. For example, if the property is sold or disposed of to a civil partner or spouse. Or, the gains fall within your tax-free allowance, or the property is sold for a loss.
The changes in action
If you are wondering how these rule changes may impact your own capital gains tax bill, here are two examples:
A property jointly purchased by a couple 20 years ago for £250,000 was lived in as the primary residence for 10 years before being rented to tenants for 10 years. Today, the property is valued at £1,000,000. Under the previous rules, capital gains tax calculated at a rate of 28% would be £58,346 for the couple. Previously, this payment would be due by 31 January in the tax year following the sale.
Today, the property would still be subject to capital gains tax at a rate of 28%. Following the changes, this would now be £88,462 for the couple. This would be due 30 days following the completion of the sale. This is a difference of £30,000 compared to just a few months ago. So, as you can see, the changes to capital gains tax legislation could potentially have a significant impact.
A single man purchased a property in April 2000 for £150,000. The man lived in the property for 8 years, at this point his partner also moved in. In May 2008 the man decided to rent his property to tenants and this situation has continued until today. The current value of the property is £750,000.
Prior to April 2020, the capital gains tax at a rate of 28% would have resulted in £77,000 of taxes due. Today, the capital gains tax bill would be £94,500. This is another example of a substantial increase in the amount of capital gains tax which is payable.
If you are thinking of selling or disposing of a property and have any concerns about the changes to capital gains tax, our team can assist. To find out more about the rule changes, please contact our experienced tax team for more information.
For expert guidance and assistance please Contact Fusion Consult. We are a multi-disciplinary business consulting firm with an in-house team of highly-skilled consultants.