Capital Gains Tax Planning – plan ahead for the April 2020 changes
Our latest Real Estate Matters publication (Download here) referred to the changes in Capital Gains Tax that will come into being on 6 April 2020.
- Lettings relief – where a property was at some stage a person’s main residence but also had a period when it was let – up to £40k of any gains was potentially relievable. From 6 April 2020 the relief only applies if the letting was undertaken whilst the owner lived in the property at the same time. I suppose it is now a ‘lodger relief’.
- Where a property was once your main residence the last 18 months of ownership, even if you were not living there, was treated as qualifying for principal private residence period and exempted from tax. After 6 April 2020 this period becomes 9 months.
Implications of the 6th April 2020 changes
Both the above changes could have costly implications when a property is to be sold. If you are thinking of selling you may wish to bring forward the timing, not only because of the rule changes but there is one other change coming into effect on 6th April 2020.
From that date – 30 days following completion of the sale of a residential property you have to submit a provisional calculation of the gain and pay the tax that is due. Ultimately the gain will be recorded on your self assessment form (if you are not registered for self assessment – you have to register) and adjust for any additional tax that is due or recoverable. You have to wait until the submission of your return before obtaining a recovery if you have accidently overpaid.
For some there will be the difficulty of determining whether they pay tax at 18% or 28% which will be dependent on their income for the year, which may or may not be easily quantifiable (redundancy, change of job etc.)
Capital Gains Tax Planning
If you are thinking of selling a property, maybe you should consider doing it in this tax year 2019/20 when you are able to assess the likely personal tax rates knowing any tax that is due won’t be payable until 31 January 2021.
Similarly, if you were thinking of gifting the property to a member of the family, the analysis may demonstrate sooner is preferable rather than later.
If the disposal has to be done after 6 April 2020, think about:
- For married couples, putting a property in joint names to use the annual allowance and possible lower rate of CGT.
- Selling shares that are showing a loss before the sale of the property so you can reduce the CGT payable.
What will be the impact of these Capital Gains Tax changes?
The impact of the rule changes is set out below in example format.
If we assume that a property owned jointly by spouses, currently worth £600,000 and acquired ten years ago for £200,000, is sold in April 2020 where the property had been occupied for the first four years of ownership and then let out until sale, the comparative CGT position is as follows:
|TO 5TH APRIL 2020||FROM 6TH APRIL 2020|
|Spouse A||Spouse B||Spouse A||Spouse B|
|Period of main residence||80000||80000||80000||80000|
|Final ownership period||30000||30000||15000||15000|
|Gain on which CGT due||38000||38000||93000||93000|
|CGT @ 28%||10640||10640||26040||26040|
|Due||31/01/2021||31/01/2021||30 days post completion||30 days post completion|
Thus, the increased gain, tax and accelerated payment can be seen.
If you have any questions regarding Capital Gains Tax planning and would like to discuss your options if you are thinking of selling a property, please contact Brendan Sharkey, Head of Construction and Real Estate. Alternatively, you can send an online enquiry.