Changes to the Capital Gains Tax treatment of residential property for UK residents

Important changes to the capital gains tax (CGT) regime for residential property disposals (both sales and gifts) came into effect on 6 April 2020.

Main residence relief and unoccupied property

Where a property has been your main residence, the final period of ownership when the property can still be treated as qualifying for principal private residence relief even though you are not living there is reduced from 18 to 9 months.

The 36 month period available to a disabled person or to someone who has moved into a care home continues to apply.

Lettings relief

Where a property has been your main residence at some point during your ownership, but has also been tenanted, lettings relief was previously available for up to £40,000 of any gain realised on a disposal of that property.  However, the only circumstances where lettings relief will apply after 5 April 2020 is where you continue to live in the property while letting a proportion of it.

Delay in taking up occupation

From 6 April 2020 the concession that previously allowed main residence relief to apply where there was a delay in taking up occupation of a property, because of building or decoration work, is properly brought into law.  The new provision allows such a period of non occupation to be treated as if the property were occupied, as long as this does not exceed two years and no one else has used the property as a residence during that time.

What are the changes to reporting and paying a tax liability?

The most significant change concerns the tax compliance around disposals of UK residential property interests.  The new provisions bring forward the reporting requirement for such disposals and also accelerate the payment of any CGT which may be due.

As from 6 April 2020, UK resident individuals and trustees will have to report disposals of UK residential property within 30 days of completion using a standalone online report.  Within the same timescale, they will also have to pay the ‘notional’ CGT (if any) based on a reasonable estimate of the amount of tax which will be assessable.  These rules will include gifts of residential property into a trust or to family members.

Non-resident individuals and trustees have been subject to similar reporting and payment rules for UK residential property since April 2015 and for UK commercial property since April 2019.  However, there was an exception that applied to taxpayers within Self Assessment or liable to the Annual Tax on Enveloped Dwellings.  This exception is removed with effect from 6 April 2020, bringing non-resident reporting into line with that for UK residents.

How will this affect you?

HM Revenue & Customs has confirmed that the legislation applies to gains arising from disposals made on or after 6 April 2020.  This means that where contracts are exchanged before 6 April 2020, but completion takes place on or after that date, the 30 day filing and payment requirement will not apply.

A report will be required where there is a chargeable gain or an allowable loss.  If the disposal is on a no gain/no loss basis (for example, a transfer between spouses) or the gain is covered in full by a relief, exemption or losses brought forward, no report will be due.  However, the disposal should still be included within the taxpayer’s Self Assessment return in the normal way.

The calculation of any gain can include capital losses available at the time of disposal, and reliefs such as EIS deferral may also be claimed as long as the conditions for the relief are met at the time the tax payment is made.  Disposals of assets giving rise to losses and EIS investments attracting deferral relief after the 30 day post-completion period can only be taken into account subsequently if included within the taxpayer’s Self Assessment return, or in a report for a later UK residential property disposal.

In order to make a reasonable estimate of the CGT arising on a disposal the taxpayer will also need to estimate his level of income in the relevant tax year, so as to arrive at the correct CGT rate(s).  This may be difficult for those who face a change of circumstance during the tax year.  Where the amount of tax due differs from the original estimate, a further return may be filed.  In most cases it is expected that changes will only come to light when the taxpayer’s Self Assessment return is prepared.

The payment of ‘notional’ CGT is, in practical terms, an interim payment similar to payments on account for income tax purposes.  The final calculation will be undertaken through the Self Assessment tax return.  At the time of publication, the format of the online report has yet to be confirmed by HM Revenue & Customs.  It is assumed that the report will be very similar to that currently required from non-residents.

It will be increasingly important ahead of a UK residential property disposal to gather the appropriate information to calculate any capital gain and the amount of CGT which may be due.  While a large number of property sales may be covered by main residence relief, changing circumstances including working abroad or separation and divorce may affect the availability of this.  It is, therefore, important for taxpayers to keep full and accurate records of their ownership history for each property which may be affected.