Over recent months as the worst of the Covid-19 pandemic has hit, the government has been making a number of concessions to help individuals and businesses cope with the economic impact.
The property sector has been hit hard as the effect of both commercial and residential tenants being unable or (just as often) unwilling to pay rents. The knock-on effects have been profound.
For commercial landlords, alongside that has been the prospect of a more long-term and deep-seated cultural change as businesses have discovered that technology has made working from home more efficient and more viable than ever for many. Quite understandably those businesses are asking themselves whether they really need the vast financial commitment of long term leases on commercial premises – over time the impact on returns to commercial landlords could be significant.
Nevertheless many things have been unaffected and amongst those were the pre-planned introduction of two major changes to capital gains tax (CGT) that affect disposals of residential property. The changes went “live” as scheduled on 6 April 2020 despite some pressure to delay them given the current situation.
The first change affects most disposals of UK residential property by individuals or trusts. Under the rules that existed before 6 April, taxpayers do not have to complete a tax return and pay the CGT until the self-assessment deadline of 31 January after the tax year in which the disposal is made, potentially giving them up to 22 months.
From 6 April 2020, certain disposals of residential properties are required to be notified to HMRC within 30 days of the completion. A brand new CGT return will need to be completed and submitted to HMRC along with a mandatory estimated payment on account (where applicable).
In addition, the gain will still need to be reported in the usual way via a self-assessment tax return and any adjustment to the tax payable paid (or a refund claimed).
A return and payment on account within 30 days of completion will not be required by UK residents where there is no tax payable – for example where the gain is fully covered by private residence relief, brought forward losses or the annual exemption. Non-UK residents will need to file within 30 days regardless.
The one coronavirus concession that has been announced is that there will not be any late filing penalty for any transactions completed between 6 April and 1 July 2020 and reported up to 31 July 2020. Transactions completed from 1 July 2020 will receive a late filing penalty if they are not reported within 30 calendar days. In addition interest will be charged if the tax remains unpaid after 30 days for all transactions from 6 April 2020.
Obviously this makes it more crucial than ever that you keep us informed when you sell properties so that we can ensure filings are made on time.
The second major change involves disposals of main residences. These continue to be exempted from CGT under the rules which provide relief for disposals of “principal private residences”. However in situations where the property has not been lived in throughout its period of ownership, the rules for calculating the amount of exemption available have been tightened and will result in much higher CGT bills in future for many people in that situation.
Under the previous rules, provided that a property has at some point been the owner’s only or main home, the last 18 months of ownership always qualifies for Principle Private Residence (PPR) relief. This applies whether or not the owner remains living in the property during this period.
From 6 April 2020, this 18-month exemption will be reduced to nine months, meaning that an additional nine months of gain may (if the owner is no longer in occupation of the property during this period) be subject to CGT. It should however be noted that existing rules allowing a 36-month final period exemption for disposals by long-term care home residents or those who are disabled remain unchanged.
Furthermore, lettings relief has in the past been a valuable relief for individuals who have difficulty selling their former residence and are obliged (or decide) to rent it out. This relief can provide up to a further £40,000 per person of tax free gain (£80,000 for a married couple) but the relief has been changed so that it is only available in exceptionally limited circumstances and in most real life examples will cease to be available.
These most recent changes to PPR and lettings relief have already started to cause problems in particular in situations where planned sales have been delayed beyond 6 April 2020 by coronavirus and in circumstances where couples are divorcing or separating.
It is more important than ever to take specialist advice.
Written by Barry Soraff – Partner
If you want to find out more about this article, e-mail Barry by Clicking Here.
Feel free to get in contact with us for any of your other Tax questions. You can e-mail Barry or give us a call on 020 8551 7200