CGT changes for property owners from April 2020
HMRC have introduced two changes to private residence relief from April 2020, both of which may result in additional capital gains tax for property owners if they sell a residential property for a gain.
On disposal of a residential property which has been occupied by an individual as their only or main residence, any capital gain is usually relieved in part or in full from CGT by PPR relief (Principle Private Residence Relief). PPR relief exempts any gains made in periods of both actual occupation where the owner occupied the property, and deemed occupation where the owner was physically absent from the property but treated as if they were in occupation.
For non-exempt periods of absence, any gain is time-apportioned against the whole period of ownership period.
One key period of deemed occupation is the final period of ownership. The current rules provide that as long as the owner has occupied the property as their main residence at some stage, then the final 18 months of ownership is treated as exempt deemed occupation for PPR relief.
This relief relating to the final period of ownership was to allow the owner time to sell the property.
A separate relief can apply to periods where a property was let out, and the owner was not in occupation or deemed to be in occupation. This is called lettings relief and can be available in addition to PPR relief. Where lettings relief applies, gains arising during the let period can be reduced by up to £40,000.This relief is being withdrawn except for those landlords who occupy the property with a tenant.
The current rate of CGT on the sale of residential property is 18% or 28% for basic rate and higher rate tax payers respectively.
The following example highlights the additional tax due on a property if it is sold on 6th April 2020 compared to 5th April 2020:
Sales Proceeds £300,000
Purchase Price £150,000
The property was purchased on 5th April 2010 and the owner occupied the property as his main residence for the first five years, the property was let thereafter until it was sold.
The property was owned for 120 months, 60 months of the gain would be subject to PPR relief while it was occupied and the final 18 months are also not taxable. Furthermore, lettings relief of £40,000 is available, further reducing the taxable gain.
PPR (£150,000 x 78/120) (£97,500)
Lettings relief (£40,000)
Taxable Gain £12,500
CGT @ 28% £3,500 (Ignoring CGT annual allowance and assumes taxpayer is a higher rate tax payer)
Post April 2020
The 60 months still qualify for PPR but now only the final nine months will be exempt. No lettings relief is available.
PPR (£150,000 x 69/120) (£86,250)
Taxable Gain £63,750
CGT @ 28% £17,850
This example shows the additional CGT due if the property is sold after April 2020 is £14,350
Finally, it should also be noted that UK residents will be required to make a payment on account of Capital Gains Tax (CGT) following the completion of a residential property disposal, for disposals made on or after 6 April 2020.