Changes to the Capital Gains Tax Regime
Emily Neale, a Partner in the Residential Conveyancing team, explains the changes to Capital Gains Tax introduced by the Spring Budget.
After much anticipation, 6 April 2020 marked the day that fundamental changes to the Capital Gains Tax (“CGT”) regime came into force. This article will consider three of the main changes; the shortening of the ‘payment window’, the reduction in the final period of ownership exemption and restrictions on lettings relief.
What is CGT?
CGT is a tax on any profit made when you ‘dispose’ of certain assets, which include a property which is not your main home, e.g. holiday homes, buy-to-let properties and main residences which have been let out at some stage. The types of disposals which are caught by CGT include both sales and gifts. CGT is only chargeable on profits which are above the capital gains tax-free allowance.
The Payment Window
In 2015 the Government revealed its plan to shorten the payment window for CGT payable on disposals of residential properties. From 6 April 2020, the CGT due on these disposals must be paid within 30 days of the disposal. This change brought about an additional layer of planning required for people looking to dispose of their properties as it became imperative to ensure that you had to hand all necessary information needed before making the payment. It also became important to ensure that, before completing a disposal, you had the funds available in order to make the payment in the 30-day window.
Private Residence Relief and Final Period of Ownership Exemption
When someone’s only or main residence is disposed of at either a loss or a profit, private residence relief (‘PRR’) allows for those profits or losses to avoid CGT liability. The property subject to PRR must have, at any time during the person’s ownership, been used by the property owner as their “permanent and continuous” home. The Final Period Exemption (‘FPE’) allows for the final 18 months of a person’s ownership to qualify for PRR regardless of the property’s use at that time, so long as the property has been occupied as the person’s only or main residence during their ownership. From 6 April 2020, FPE was reduced to 9 months.
Private Residence Relief and Lettings Relief
Another PRR relief which changed from 6 April 2020 was lettings relief. This relief applies to people who let all or part of their main residence, or even their former main residence. As from 6 April 2020, the relief is restricted to owners who share their properties with a tenant, and this will apply to all disposals made on or after this date. The Government has set out that in order to constitute “shared occupation”, the owner must reside in the same property with the tenant and must continue to reside in that property as his or her only/main residence throughout the time that the property is let.
The changes brought into effect from 6 April placed an additional administrative burden on certain property owners seeking to dispose of their properties by sale or gift. In order to meet the new payment window, property owners will need to plan in advance in order to ensure that, in particular, their finances are available to meet this new obligation. The changes also sought to curtail the PRR relief and restricted the persons to whom the reliefs were available as some property owners found that they have been unable to agree and complete a sale of their properties within the new 9-month window for FPE. The reformed lettings relief sought to shut out landlords who do did not occupy a property jointly with their tenants and only applied to those few who simply rented out a spare room in their home. What will property owners need to do when considering a disposal of their additional properties? Best advice would be to plan and prepare well in advance of the disposal. In practical terms, this would mean reviewing finances to ensure that you have available funds to pay your tax liability and it is important to keep this under constant review before the disposal is completed. Property owners will also need to ensure that the important dates, e.g. completion dates and tax-return dates, are clearly noted and highlighted to ensure that no deadlines are missed.