Changes to the Capital Gains Tax Regime.

Further changes are imminent for the Capital Gains Tax (“CGT”) regime with those owning second properties being hit hard once again.

The government has already introduced various changes affecting property owners, most notably in relation to the increased amount of stamp duty payable on the purchase of second properties, the restricted relief on finance costs (i.e. mortgage interest is no longer fully deductible from rental profits for higher rate taxpayers) and the abolition of the 10% wear and tear allowance.

HMRC are now on the cusp of introducing further changes (subject to a final consultation) which are expected to come into force in April 2020.  

Changes to Letting Relief

Under current legislation, Lettings Relief is available to claim if you let out either part or all of your home and you have lived in the property at some stage. The relief does not apply to buy-to-let investors who have never lived in the property.

The relief, if applicable, can have the effect of reducing a capital gain on the sale of the property.

The amount of relief you can claim is the lower of:-

  • The gain you receive from the letting proportion of the home;
  • The amount of private residence relief you can claim; or
  • £40,000.

The proposal put forward by the government is to restrict Lettings Relief to only those individuals who have shared the relevant property with the tenant. This will effectively abolish the relief, given only a very small number of individuals will fall within this far more restrictive remit of shared occupancy.

Changes to the final period of exemption

The Principle Private Residence Relief you automatically receive on the sale of your only or main home is one of the most valuable tax reliefs available to us and there is no indication that the availability of this relief is going to change.

However, where an individual has to move out of their only or main home, CGT could become payable. To counteract this, the final period of exemption was brought in.

Under current legislation, the final period of exemption (or deemed period of occupation) is 18 months; the effect of which is that provided an individual sells their home within 18 months of vacating their home, there will be no CGT to pay.

The proposal put forward by the government is to reduce this final period of exemption from a period of 18 months to a period of 9 months. This means that if an individual does not sell their home within 9 months of vacating it, there will be an element of CGT to pay.

The above proposed changes are not expected to affect those living in or moving into residential care homes or disabled home owners where it is understood that the 36 month period of exemption will remain.

Periods of Non Occupation – Exemptions

Some periods of long term non-occupation are ignored for the purposes of claiming Principal Private Residence Relief.

The qualifying periods of absence are as follows:-

  • absences for whatever reason, totalling not more than 3 years in all;
  • absences during which you’re in employment and all your duties are carried on outside the UK; or
  • those totalling not more than 4 years when either:-
    • the distance from your place of work prevents you living at home; or
    • your employer requires you to work away from home in order to do your job effectively.

In addition, you will keep your Principal Private Residence if you cannot return to your property after a period working away from your home because your existing job requires you to work away again.

Timelines to settle CGT

The government have proposed changes to the timescales for making payment of any CGT due on the disposal of residential property.

Under current legislation, if you are UK resident and make a Capital Gain, this must be reflected in your tax return for the year in which the Capital Gain is made with the tax being due by 31 January in the following tax year.

Under the proposed new legislation, the disposal (i.e. sale, transfer or gift) of UK residential property will need to be reported to HMRC and the CGT paid within 30 days of the disposal of the residential property. Failure to report the disposal and make payment within this timeframe, will result in interest and penalties being levied by HMRC.

Election for Principal Private Residence Relief

If you have two or more residences, you have the option of electing which of those residences should be treated as your main residence for CGT purposes. The current legislation specifies a two year time limit to make the election and that two year period starts from when the individual has a change in circumstances (i.e. from the date that another property started to be used as a residence; not necessarily from when a new property was acquired).

The election made by an individual can be altered by notifying HMRC.

Spousal Transfers

The way in which the spousal transfer rules apply are also due to change. Under current legislation, the spouse or civil partner receiving a property will only inherit their spouse’s ownership history if the property being transferred is their only or main residence at the time of the transfer.

The spouse receiving the property will also qualify for Principle Private Residence Relief for the period prior to the transfer provided the property being transferred (which was the only or main residence of the transferring spouse) was the couple’s only or main residence at the time the transfer was made.

The proposal put forward by the government is to enable the recipient to inherit their spouse’s ownership history and the use to which the property was put during the transferring spouse’s ownership regardless of whether the property is their only or main residence at the time of the transfer.

It is not expected that the rules will have retrospective effect.

Summary

These changes are expected to be reflected in the Finance Bill 2020 and become UK law in April 2020.

If these changes do come in, many property owners could find themselves in the future not only with a much larger CGT bill to pay but with the burden of settling the CGT bill in a much shorter timeframe than present.

If you would like further information please contact Kerry Sawyer or Jeremy Duffy.

The contents of this newsletter are intended as guidance for readers. It can be no substitute for specific advice. Consequently we cannot accept responsibility for this information, errors or matters affected by subsequent changes in the law, or the content of any website referred to in this newsletter. © Mundays LLP

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