Wills, trusts, tax and probate

Capital Gains Tax on property

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Latest update following the budget announcement:

In the Autumn Budget 2021 the chancellor avoided making increases to capital gains tax on property.

Instead he offered some good news by extending the reporting and payment deadline for UK residents disposing of UK residential property that results in a CGT liability. You now have 60 days from completion of the disposal to deliver a CGT return and pay any tax due. The deadline has also been extended to 60 days for non-UK residents required to report a direct or indirect disposal of UK land and make a payment of tax.

The change takes effect for disposals that completed on or after 27 October 2021.

What is Capital Gains Tax?

Capital Gains Tax (CGT) is a tax on the profit you make when you sell or ‘dispose of’ an asset that has increased in value since you purchased it. To clarify, you are not taxed on the full amount you make from the sale, only the profit or ‘gain’.

What does it mean to ‘dispose of’ an asset?

Disposing of an asset refers to more than just selling it, and can include: 

  • Gifting or transferring it to somebody else
  • Exchanging it for another asset
  • Receiving compensation (e.g. an insurance payout) due to the loss or damage of the asset.

    If you are organising your finances, it can be a good idea to talk things through with a wealth management expert. Tees has independent financial advisers you can ask for advice.

When do I have to pay Capital Gains Tax on the property?

You will usually be taxed on the sale of a property if it is a second home or buy-to-let property, or if you have let out part of your main residence. CGT also applies to the sale of commercial premises, land and inherited property.  Certain costs, such as legal and estate agency fees, stamp duty or surveying costs, are deductible when calculating your ‘gain’.

However, under most circumstances, you won’t usually be taxed on the sale of your main home due to a tax relief called Private Residence Relief (PRR). 

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What is Private Residence Relief and how do I know if I qualify?

PRR will exempt the gain from CGT when you’re selling a home you have lived in as your main residence for the entire period of ownership. You must meet this and all other PRR criteria to be eligible for the relief. There are a number of scenarios that may limit your entitlement to PRR, including; 

  • Letting out all or part of your main residence (not including having a lodger who shares the house with you)
  • Using part of your main residence for business purposes only
  • Generally, the grounds must not exceed 5,000 square metres
  • You must not have bought the property simply to sell it on for profit.

What are the Capital Gains Tax rules for second homeowners, and what has changed?

People selling a second home or buy-to-let property must pay CGT on any profit they make from the sale after the deduction of any allowable expenses and allowances. The taxable gain is treated as the “top slice” of your income and basic rate taxpayers will be taxed at a rate of 18%, while higher and additional rate taxpayers will be taxed at 28%. As the gain is the top slice of your income it is possible for some of the gain to be taxed at 18% with the rest a 28%.

From 6 April 2020, UK residents selling a home that is not their main residence will have 30 calendar days from the date of completion to notify HMRC of the gain on a new CGT return and pay any CGT owed. This is a significant shortening of the previous deadline; those selling a property liable to CGT prior to the start of the 2020 tax year had until the self-assessment tax return deadline of 31 January following the end of the tax year of sale to notify HMRC and pay any tax due. To highlight the magnitude of the change, taxpayers could have had up to 22 months to make their payment under the old system against just one month now.

As an example, if a property was sold on 5 April 2020, the taxpayer wouldn’t need to notify HMRC and pay CGT until the date their 2019/20 tax return was due, i.e. 31 January 2021.  However, if that same property was sold on 6 April 2020, the taxpayer would only have until 6 May 2020 to complete the necessary paperwork and make their payment – a reduction of nearly nine months. 

What changes have there been to Private Residence Relief?

There are special rules governing the sale of a home the  taxpayer has not always lived in. In circumstances such as these, you may not qualify for full Private Residence Relief, but there may be certain periods that will qualify. 

Prior to the 2020/21 tax year, provided the property had been your home at some point in your period of ownership the last 18 months before the property is sold were always eligible for the relief (whether or not the property was your main residence at that time). For sales on or after 6 April 2020, however, this relief period reduced to nine months. For people purchasing a home prior to selling their old one, this effectively halves the grace period within which you can live in your new property without paying CGT on your former home. In practice, this means taxpayers must ensure their old property is sold within nine months to avoid a potential CGT charge.  This final period is extended to 36 months in certain limited circumstances, most typically where the taxpayer moves directly from the property in to a care home.

You  may also get relief for any periods of absence adding up to three years, or four years if you had to live away from home in the UK for work. You’ll get relief for any period of time you were living outside of the UK for work. You must have lived in your home before and after your absence to qualify, unless work prevented you from doing so.

What about Lettings Relief?

Another important change from 6 April 2020 is the loss of lettings relief in all but extremely limited circumstances. Where a taxpayer previously qualified, this relief previously exempted up to a maximum of £40,000 of a gain from CGT in instances where a former main residence had been subsequently let out. The loss of this relief could cost some taxpayers up to an additional £11,200 in tax. Unfortunately this previously generous relief is now unavailable in most circumstances. 

What qualifies as my ‘main residence’ for Capital Gains Tax purposes?

What makes a main residence is a complicated issue in tax law, very simply put it is your home. Home is of course, much, much more than simply where you live and will be relatively easy to identify in most circumstances.

If you own more than one home, you are able to nominate which property you would like to be your main, tax-free residence. This doesn’t have to be the one you live in all, or even most, of the time. You may wish to nominate the property you expect to make the most profit on when you sell it. Once you have purchased a second home, you have two years within which to nominate your main, tax-free residence. 

It should be noted that if you are married or in a civil partnership, you can only nominate one property between you. 

What will I need to do?

If you sell a UK residential property and a chargeable gain arises you’ll need to report the gain to HMRC on a CGT return and pay the tax within 30 days of completion. HMRC will issue penalties and charge interest if you needed to report a gain/pay tax and failed to do so.

With such a tight deadline, you’ll need to make preparations in advance to ensure compliance with the new 30-day deadline. Unless you are classed under certain categories for whom the use of digital technology cannot reasonably be expected, you are expected to make your CGT return and payment online via HMRC’s government gateway. If you don’t have a government gateway account, you’ll need to apply for one – a process which can take up to 10 working days, so this will need to be factored in. You’ll also need certain details to hand to fill in the required paperwork – these should also be gathered in advance to prevent delays and any potential penalties. The information you’ll need includes: 

  • The date the property was acquired
  • Costs of purchase and disposal e.g. purchase price, legal, surveying or estate agency fees (these can normally be found on the completion statement from your solicitor) 
  • Costs of eligible home improvements
  • Earnings in the applicable tax year.

To calculate your taxable gain you will need to deduct the allowable costs (be careful, not all costs are allowable) from the sale proceeds. You can then deduct any allowances calculated such as PRR. Finally, if you haven’t already used it, you can deduct your annual CGT tax-free allowance of £12,300 (2020/21).

It is this “taxable gain” that will be added to your estimated income in order to calculate the tax payable. You’ll pay CGT of 18%, 28% or a combination of the two on the remainder, depending on your tax band. 

If you complete a tax return you will also need to include details of the disposal on the return as normal, paying any tax adjustment through self-assessment as normal. 

Tees has a dedicated team of tax accountants that can assist you with your rental and capital gains tax reporting requirements. Please do not hesitate to contact us if you would like assistance with your tax reporting obligations.

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