Jim McMahon: Capital Gains Tax
Jim McMahon, tax manager at Balfour+Manson, discusses the upcoming changes in residential property sales which will impact Capital Gains Tax liability.
Whilst significant changes to Capital Gains Tax are rare, April 2020 will see several changes brought in which will affect those disposing of residential property where the disposal results in a Capital Gains Tax (CGT) liability.
From 6 April 2020, CGT incurred following the disposal of a residential property is to be reported and paid within 30 days of the completion date. Failure to report and pay on time will result in HMRC imposing interest and potential penalties. This new deadline applies even where no money has changed hands – e.g. when a property is transferred into trust or gifted to a family member.
At present, any capital gains would be reported on the self-assessment tax return, with the resulting tax being payable by 31 January following the year in which the gain was made. So, for example, at present a second property sold on 1 May 2019 would be reportable on the self assessment tax return with the tax being payable by the following 31 January 2021. In this example, this gives a period of 20 months longer to pay the tax than under the new rules.
The requirement to report the transaction within 30 days means that it is vital that all relevant information is gathered as early in the process as possible. The information required to ensure an accurate return is submitted includes the date of acquisition, acquisition cost, dates and details of any capital improvements carried out, disposal details, national insurance numbers of all individuals who hold an interest in the property, Unique Tax Reference of each individual if already registered for self-assessment, and details of the estimated income from all sources which is required to enable a reasonable estimate to be made of the CGT liability.
It will still be necessary to declare any transaction on the self assessment tax return, if relevant, and compute the final liability and either account for any additional tax due, or claim a refund if over-estimated.
Whilst HMRC are taking steps to ensure that taxpayers are made aware of these changes, the onus is very much on the taxpayer to comply. Ignorance of the law is never regarded as a reasonable excuse.
Other changes due to be implemented from April 2020 are potentially significant and could affect decisions about selling properties or making them available to let.
Changes to Private Residence Relief (PRR)
From April 2020, this relief will apply to the full period a taxpayer lived in the property as their principal residence plus the final 9 months of occupancy (unless they can claim special circumstances, such as a disability or having to move into care). This is down from 18 months (and 36 in 2014)
Changes to Letting Relief
This is currently the lower of:
- The amount of gain attributable to the letting proportion of the property
- The amount of PRR that can be claimed
From April 2020, this relief will only be available to people who were sharing occupancy of a property, as their main home, with a tenant throughout the period of letting. This will affect most people who rent out a property that they’ve previously lived in, as it will make more of the capital gain on their property assessable to CGT.
Preparation and early engagement with your professional adviser is key if penalties and/or interest charges are to be avoided. As already indicated, ignorance of the changes will not be accepted as a reasonable excuse. Should you require assistance in completing a return, or advice on what you should do, please do not hesitate to contact our tax team.