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Nov 6 2019 | Mike Rule

Changes to Capital Gains Tax (CGT) rules proposed for 6 April 2020

The 2020/2021 tax year could see some significant changes introduced to the amount of CGT relief available on the sale of rental properties which have formerly been a main residence of the landlord.

About the proposed changes to CGT in 2020Changes to Capital Gains Tax

Currently, when a landlord disposes of a property that they previously lived in, CGT exemption applies to those periods when the landlord was living there (as their main residence) plus a relief allowance of 18 months.

The proposed changes will reduce the relief allowance from 18 months down to 9 months.

There will also be a change to the criteria for lettings relief. Currently, landlords selling their former home are entitled to have up to £40,000 of their gains exempt from CGT. Married couples could claim up to £80,000 as the relief is per person.

Instead, lettings relief will only apply to those periods where the landlord occupied the property at the same time as their tenants.

As CGT is calculated over the period of ownership of the property, we’ve illustrated the changes by comparing a property sale example before and after 5 April 2020.

An example scenario:
  • Property acquired for £250,000 in April 2009
  • Landlord (single owner) lived in the property until April 2014
  • April 2014 until March 2020 the property was rented out
  • The property sold for £400,000 in March 2020

The total gain over the period of ownership of 11 years is £150,000 (£13,636 per annum)

Tax year sold Exempt periods applicable Total gain less exemption period Net gain before letting relief Letting relief applicable Taxable gain before annual exception
2019/2020 5 years lived in property plus last 18 months of ownership (total 6.5 years)

 

£88,636

 

Calculated as

£150,000 X 6.5 / 11

 

 

£61,364 £40,000 £21,364
2020/2021 5 years lived in property plus last 9 months of ownership (total 5 years 3 months)

 

£78,409

 

Calculated as

£150,000 X 5.75 / 11

 

£71,591 Nil £71,591

The example scenario above demonstrates that the changes would increase the taxable gain by £50,227. If we assume the highest rate of CGT in applicable (28%) this gives an additional amount of tax payable of £14,063, not an insubstantial sum!

 

When CGT will be due

The timing of when CGT is paid following the property sale is also subject to change from April 2020. Currently for the tax year 2019/2020, any CGT due won’t need to be paid until 31 January 2021.

However, if the change is approved, full payment of CGT due will need to be paid within 30 days of the sale of the property. This means that if you sell a property on 1 June 2020, you’ll have until 1 July 2020 to pay the CGT that is due.

There will be an interim period of approximately 9 months where properties sold on or after 6 April 2020 will be due for CGT payment well in advance of those properties sold in the prior tax year, 2019/2020.

Non-UK residents

If you are non-UK resident the above changes may apply to you slightly differently. As a reminder, please note that you must also submit a non-resident CGT Return within 30 days following the disposal of the property.

 

How HJS Accountants can help

If you are considering selling a property, we recommend getting in touch with your Client Manager to discuss how these changes could apply to you. Call the team on 0808 1644 222 or email accountants@hjssolutions.co.uk

Further updates on the proposed changes will be available on the HJS Accountants website.