Important changes are coming into effect which mean second home owners and buy-to-let landlords may be subject to capital gains tax payments sooner than anticipated. The legislation will be introduced in the Finance Bill 2019-20 and would be effective from April 2020.
What is changing?
The changes that are due to be implemented from April 2020 will have an impact on the capital gains tax liability for second home owners and buy-to-let landlords at the time the property is sold. The changes will affect:
- Lettings relief
- Final period of exemption
If you are letting out a property which you once lived in as your main residence, the current rules state that when you come to sell it, you can claim lettings relief on the period where the property is let out.
Lettings relief can reduce the capital gains tax due on the sale of a property as it is possible to claim up to £40,000 individually or £80,000 if the property is jointly owned by a spouse or partner.
The proposed change to this relief is that the relief can only be applied where the owner(s) occupy or occupied the property with the tenants at the same time.
As the letting’s relief will be restricted to landlords who share occupancy with their tenants, this relief will only be available to a limited number of people since buy-to-lets are often not occupied by the landlord.
If you are considering selling a residential property which you have previously used as your main home, it is advised that you seek professional advice before doing so to sell it in the most tax-efficient way.
Reduction in the final period of exemption
Currently, the final period of exemption relief can be applied to a property up for sale, as long as the person or persons who own the property have lived in the property as their main residence for a period of the property’s ownership.
Regardless of whether or not they lived in the property during the final 18 months, the final 18 months are regarded as occupied by the owners – even if they have already moved out to their new home.
Provided the property is sold within 18 months of the owners moving out, the owners will not be subject to capital gains tax on the disposal of the property.
The final period of exemption relief is to be reduced from 18 months to 9 months. However, there will be no changes to the 36-month relief that is available to individuals who live in a care home or are disabled.
The reduction in the final period of exemption will increase the capital gains tax liability for anyone who is selling their main home and has accrued a period of private residence relief.
How to pay capital gains tax on residential property
In the current tax year (2019/20) individuals selling a residential property will not be required to pay any capital gains tax after the completion of the sale until 31st January 2021. Payments on account can be made before that date but the full amount is not required until January 2021.
However, from 6th April 2020 the rules are changing. Similarly, to a self-assessment, individuals or trustees selling a residential property will be required to report the capital gains tax they owe and make a payment on account.
Other proposed revisions
Other amendments to sections 222 to 224 that will be introduced in the Finance Bill 2019-20 include:
- Changes to job-related accommodation relief
- Clearer rules regarding the transfer of residential property between civil partners or spouses
The job-related accommodation relief is due to be extended to serving members of the armed forces. Those who are required to live away from home will receive payments under the MOD’s Future Accommodation Model to pay for accommodation, instead of being provided with accommodation as they currently are.
The amendments will also make the rules regarding the transfer of part or all of residential property between civil partners and spouses fairer. The measure will ensure that the partner or spouse inheriting the property will also inherit the property’s history of use which will result in a fairer outcome.
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For further information about the changes to capital gains tax on property, please visit the government’s website where details can be found about the measure, the proposal and who is likely to be affected.
Please keep checking Churchill Knight & Associates Ltd blog for all the latest legislation changes and market updates which could affect your industry. Alternatively, visit our website for more information, or contact us to find out more.