Three potential changes to capital gains tax could have a significant impact on people who make profits from selling homes in 2020/21.
This triple whammy will affect those who have a main residence and let it out, perhaps while working away or going through separation or divorce.
Whatever the circumstances, people in this boat face the prospect of having to pay considerably more capital gains tax if they sell up on or after 6 April 2020.
While these changes need to be rubber-stamped when Finance Act 2020 lands next spring, planning is already under way at Thomas Barrie.
Letting relief
Letting relief can provide a reduction to your capital gains tax liability if a home has been rented out under your ownership.
It applies after private residence relief has been calculated, which covers the time you lived in the property as your main residence. The amount of letting relief available is whichever is the lowest of:
- the private residence relief
- the chargeable gain you made from letting your home
- £40,000
The tax break is available to every owner, not just every property, so it could be extremely valuable to co-homeowners.
From 6 April 2020, however, this exemption will only apply to homeowners who have been in shared occupancy with a tenant before selling up.
Final-period exemption
The final 18 months before you sell your home usually qualify for private residence relief, meaning they are tax-free.
Subject to confirmation in Finance Act 2020, HMRC plans to lower this final-period exemption from 18 months to nine months.
This proposal does not extend to people who are moving into social care or with disabilities.
30-day payment window
Any capital gains tax owed on the sale of your home is currently paid through self-assessment – at the end of the tax year after you sold your home.
Typically, payment of this liability could be anywhere between 10 and 22 months after the property was sold.
From 6 April 2020, any capital gains tax owed will have to be paid within 30 days of the house being sold.
The triple whammy
While those planned changes sound relatively minor on the surface, their combined impacts will be severe, as illustrated in this example.
Alistair bought a house in Dowanhill for £200,000 in March 2005 and plans to put it on the market in 2020 at £500,000 – a potential gain of £300,000.
He lived in the house until March 2015 (120 months) and has been renting it out while living down south ever since.
Private residence relief is available for the 120 months he lived in Dowanhill, protecting £200,000 of his potential gain from tax.
If Alistair sells the house on or before 5 April 2020, the 18-month final-period exemption will increase his private residence relief by £30,000.
The potential liability left is £70,000 and letting relief provides Alistair with an extra exemption, through whichever is the lowest of:
- the private residence relief (£230,000)
- the chargeable gain you made from letting your home (£70,000)
- £40,000
As £40,000 is the lowest of those three figures, that is the amount of letting relief that can be added to Alistair’s exemption.
Factoring in the £12,000 capital gains tax allowance in 2019/20, Alistair will pay capital gains tax at 28% on the £18,000 left – £5,040.
If he were to sell his home 24 hours later, in 2020/21, his final-period exemption would be halved to nine months.
His relief under the final-period exemption would also halve, from £30,000 to £15,000, increasing his gain to £85,000.
No letting relief would be available as Alistair was not in shared occupancy while he lived down south, keeping his gain at £85,000.
The £12,000 capital gains tax allowance would still apply, resulting in £73,000 being liable to tax at 28% – £20,440.
Get in touch
Capital gains tax planning forms a large part of our personal tax-planning service.
Regardless of whether or not these changes come to fruition next April, our partners can help you optimise your tax position.
Speak to one of our advisers by calling 0141 221 257 or email us at contact@thomasbarrie.co.uk to find out how we can help.