The UK Government has been scrutinising the taxation of residential property, which has become increasingly onerous over the last few years. This has been driven by political pressure and a perceived inflation of property values by absent second home owners and investors on the international market. From the introduction of the Annual Tax on Enveloped Dwellings (‘ATED’) to the extension of capital gains tax (‘CGT’) to non-residents and inheritance tax to non-domiciled individuals who own UK property through structures, this trend is continuing…
Individuals looking to sell or dispose of residential property can expect a number of further changes to how they might be taxed after 6 April 2020, with less generous reliefs and more stringent reporting requirements.
The sale of residential property, where Principal Private Residence (‘PPR’) relief is unavailable (more on that later), often incurs a CGT liability. Currently, UK residents who sell or dispose of residential property that attracts a CGT liability are required to submit a tax return by the 31 January after the end of the tax year in which the sale/disposal is made (ie between 10 and 22 months after the disposal). From 6 April 2020, all owners of UK property (whether resident in the UK or not) must file a return and pay the tax due within 30 days of completion.
Those subject to the new reporting requirement would do well to have their documentation to hand before the sale to avoid a last minute rush or penalty charges for late filing. The information required will include the acquisition date and cost, details of any improvements made during the ownership period, as well as amounts spent, for example, conveyancing fees. Where there is no tax liability, there will be no requirement to report.
The situation is complicated by the fact that (as is the case now) the rate of CGT payable will be dependent on the amount of income the taxpayer receives during the tax year in which the property was sold. The taxpayer will therefore be required to provide a reasonable estimate of the CGT payable, based on an estimate of his or her income for the year. Basic rate tax payers will continue to pay CGT at 18% and higher rate tax payers at 28%. Those with fluctuating levels of income may find the tax liability difficult to estimate.
The reporting must be done online, requiring taxpayers to have a Government Gateway account or to digitally authorise a tax agent to do it for them.
More details on the CGT reporting requirements are expected before the 6 April 2020 deadline.
PPR relief can reduce or eliminate the amount of tax paid on gains realised on the sale of residential property. To qualify, broadly speaking, an individual must sell a property which has been their main residence for at least part of the period of ownership. Two changes to the way PPR works are expected from April 2020:
1. Currently, provided that the property qualified for relief at some point in its ownership, the final 18 months of ownership will always qualify for relief, even if the property is no longer the owner’s main residence for that time period. Not so long ago this exemption applied to the final 36 month period, this was reduced to 18 months in April 2014 but the period will be halved again to only the final 9 months from April 2020.
2. Likewise, under current law, lettings relief applies on the sale of a property that has been used as a main residence and as a rental property, so that gains equal to the lesser of (a) the gain attributable to the period the property was let, and (b) £40,000 are not taxed. Where there are co-owners of property, each co-owner gets his or her own relief. This has clearly been deemed too generous because, from 6 April 2020, lettings relief will be restricted so that the relief is only available where an owner is actually in shared occupancy with a tenant (such as a lodger).
Stamp Duty Land Tax (‘SDLT’)
Taxpayers have already seen a similar reduction to the period to file returns for SDLT, which is payable on residential property purchases over £125,000 (or only £40,000 on the purchase of second homes). Since 1 March 2019, the time limit for SDLT returns to be submitted to HMRC is just 14 days from completion.
It is also worth noting that the Government is consulting on the introduction of a higher rate of SDLT payable by individuals who are not resident in the UK. This may see the top rate of SDLT reaching as much as 18%.
These changes are technical and unlikely to make front page news. However, those considering selling a property that may benefit from the automatic exemption or lettings relief may wish to undertake planning to accelerate their disposal event to maximise the benefit of the current, more generous, rules.
Individuals should make sure they are aware of the filing requirements well in advance of selling a property to avoid being caught out by penalties for late filing. Sellers should contact their tax advisers when a sale is underway to ensure compliance with the relevant timescales.