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New Capital Gains Tax (CGT) rules come into effect from 6th April 2020 and have the potential to increase your liability by a considerable margin if you are planning on selling a property that was once your main residence after this date.

Capital Gains Tax planning is crucial if you’re thinking of selling such a property - planning ahead for these changes could save you thousands of pounds. Julie Palmer, partner at RBR Advisory, discusses the upcoming amendments to the Capital Gains Tax regime, and explains what individuals can do to limit the financial impact of these changes.

New Capital Gains Tax rules 2020

The Finance Bill 2020 brings in changes not only related to the tax reliefs available, but also regarding the timing of CGT payments. From 6th April 2020, CGT rules will change as follows:

Private Residence Relief (PRR)

Previously, principal Private Residence Relief was available to homeowners for the full period of owner-occupation, plus 18 months after moving out of their main residence. This qualifying period has now been halved to just nine months.

It could affect you if you’re moving into a new home before selling your former residence, should that property fail to sell within nine months. The special rules for people moving from a main residence into full time care, or those with a disability, remain unchanged at 36 months, however.

Lettings relief

Lettings relief of up to £40,000 was previously available to those renting out a former main residence, but after 6th April 2020 you must be living in the property during the entire rental period in order to qualify for lettings relief. This move means lettings relief is now heavily restricted, and only applies to those sharing the property with their tenant(s). Essentially, therefore, this can be seen as more of a ‘lodger’ relief than a straightforward lettings relief.

"Those most at risk of being caught out by this change are property owners carrying out a single transaction, where the property being sold was previously their main residence."

Timing of payments

Another change of note is regarding when CGT liability is due to be paid. From 6th April 2020, Capital Gains Tax liability must be provisionally calculated and paid within 30 days of a property being sold. This rule also applies to properties that are gifted or placed in trust. If payment isn’t made within this 30-day deadline, HMRC will add interest and may apply additional penalties on top.

This revised time period for payment is considerably shorter than that in effect prior to the Finance Bill 2020, when Capital Gains Tax had to be paid by 31st January in the year following the gain being made.

Those most at risk of being caught out by this change are property owners carrying out a single transaction, where the property being sold was previously their main residence.

There are also issues regarding the level of CGT which will apply to each individual. Whether CGT is payable at either 18% or 28% depends on how much income has been received during that tax year. For some, which tax bracket they fall into may not be clear until the end of the year due to a variety of factors such as redundancy, a change of job, or fluctuating income. There is concern that some will be required to make an almost immediate payment to cover their CGT liability which may be grossly under- or over-estimated.    

The importance of Capital Gains Tax planning

Capital Gains Tax planning is now more important than ever if you own property that you once resided in and is now being rented out to tenants. Failing to understand the implications of these new rules exposes you to allegations of non-compliance as well as financial penalties in the form of added interest and HMRC fines.

If you’re anticipating selling the property in the near future, or are undecided as to your long-term plans for it, it would be worthwhile obtaining professional advice as you may decide you need to sell sooner rather than later.

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