From April 2020 changes are being implemented to tackle the so-called ‘flipping’ of properties and better target the exemption of owner-occupiers. The changes have been based on the statistic that it takes an average of 19 weeks to sell a house.
Who is this aimed at? Individuals who own one or more residential properties that they have lived in as their main residence at some point.
This has no effect on buy-to-let properties.
Who is likely to be an unintended target? Partners that are splitting and take more than 9 months to process the divorce or agreement. Families in a chain, that buy a new home, and then the sale of the first house falls through and takes longer than expected to sell.
There are two big changes to Capital Gains Tax (CGT) on residential homes:
1. Private Residence Relief (PRR) currently states that where a home has been your main residence at any time, the final 18 months are exempt from capital gains tax under PRR too. This final period is being reduced to 9 months.
2. Letting relief currently applies when the property has been let in its entirety. The relief is calculated as the lower of £40,000, the gain in the let period or the private residence relief available.
Reforms to letting relief means that it will now only apply where the owner of the property is in shared occupancy with a tenant.
The condition is that:
a) Part of the dwelling-house is the individual‘s only or main residence, and;
b) Another part of the dwelling-house is being let out by the individual as residential accommodation otherwise than in the course of trade or business
The new letting relief is the lower of £40,000 or the actual gain in the let period, but only if these conditions are met.
Timing is now essential, as this change will have a massive impact.
Tom is a UK tax resident. He bought a flat in April 2010 and lives there until April 2015 when he gets married. He lets out the flat and moves into a house that is jointly owned with his wife.
When he sells the flat, he makes a gain of £120,000.
If he sells in March 2020
If he sells in May 2020
Another important change that will be effective from April 2020 is the 30-day rule.
· When you dispose of a UK residential property on or after 6 April 2020 you must report the disposal to the HMRC, and pay the tax within 30 days of completion (not exchange).
· You will be required to determine the CGT which is notionally chargeable at the filing date.
· There is no need to make a property return when the filing date would be after the ordinary self-assessment return is filed
Note: this rule has applied to non-residents from April 2019 for direct and indirect disposals of UK land