Capital Gains Tax (CGT) is often quoted as having one of the lowest yields in tax collection terms. However, data released in April by HMRC suggests this has changed, revealing the CGT yield for the financial year 2018/2019 hit a record £9.2 billion, up from £7.8 billion in the previous 12 months. Recent changes to tax relief on interest for buy-to-let properties caused many property owners to sell up and therefore a rise in CGT. From April 2020, further changes lie ahead for CGT when further restrictions on tax reliefs will apply.
CGT on disposal of property
At present, when you sell a property that is liable to CGT, the ‘gain’ is declared when you file your self-assessment tax return. The calculated CGT is then paid on the 31 January following the tax year in which you made the disposal. This means you do not need to pay the tax for up to 21 months from the date of disposal. For example, if you sold a property on 6 April 2018, the tax becomes payable on 31 January 2020. Alternatively, if the sale took place on 5 April 2018 - one day earlier - the tax would have been payable on 31 January 2019.
Under the new rules, payment of CGT will be due within 30 days of the disposal.
Lettings relief provides a very valuable element of CGT relief where a property which was formerly an owner occupied private residence is later rented out. Here, part of the gain on disposal is attributed to the period in which the property was being let out and not owner occupied. Lettings relief is only available if the property had at some point been the only or main residence of the owner occupier, and if Private Residence Relief (PRR) is available in respect of part of the gain.
The amount of lettings relief is the lowest of:
- the amount of PRR;
- £40,000; and
- the amount of the gain that is chargeable by reason of the letting.
New rules from April 2020
On 1 April 2019, the government published a consultation document on CGT, outlining measures seeking to change ancillary reliefs to PRR and amending the final period of deemed occupation for the purpose of PRR. On 11 July 2019, the Finance Bill was published, including the same measures.
The intention is that, from April 2020, the final 18 months of ownership will be reduced to 9 months and lettings relief will only be available to owners who were sharing occupancy of a property, as their main home, with a tenant throughout the period of letting.
The changes mainly affect those disposing of a second home or rental property, because the new rules will not apply when the gains are not chargeable to CGT where PRR covers the gains. Therefore, it would appear that the buy-to-let market is being targeted even further, with more reliefs being removed and an alteration to the qualifying period previously considered exempt.
HMRC published its response to the 1 April 2019 consultation document, on 21 July 2019, as follows:
“The government believes its proposals in relation to lettings relief will better target the availability of PRR at those who are owner occupiers. Taxpayers have until 6 April 2020 to rearrange their affairs under the current rules, for example disposing of a property, should they choose to do so.”
Calculating the chargeable gain for CGT
The first example below calculates the chargeable gain for CGT under the existing rules, applying PRR and the current lettings relief. The second example calculates the chargeable gain under the new measures from April 2020, reducing the final 18 months of deemed ownership to 9 months and applying the new lettings relief.
Michael purchases a property on 1 October 2007 for £160,000. He lives in the property as his main home for three years. Michael then moves in with his partner, letting out the property for six years until he sells it on 30 September 2016 for £285,000. The costs of acquisition and sale were £5,000 each. Michael owned the property for a total of 9 years.
Before taking account of any available reliefs, Michael realises a total gain of (£285,000 - £5,000) less (£160,000 + £5,000) = £115,000.
The property was Michael’s only or main residence for three years and therefore this period qualifies for PRR. Additionally, the last 18 months of ownership are also exempt, bringing the total period qualifying for PRR to four and a half years.
The part of the gain eligible for PRR is therefore:
Total gain (£115,000) x period qualifying for PRR/period of ownership (4.5years/9years) = £57,500
The remaining £57,500 of the gain (£115,000 less £57,500) is attributable to the letting period and does not qualify for PRR.
However, lettings relief is available for the letting period. The amount of lettings relief is the lowest of:
- the gain qualifying for PRR (£57,500);
- £40,000; and
- the gain attributable to the letting (£57,500).
Therefore, lettings relief is £40,000.
The availability of both PRR and lettings relief reduces Michael’s chargeable gain to £17,500.
Using the example of Michael as above, but extending the date of disposal to September 2020. Michael realises a total gain of (£285,000 - £5,000) less (£160,000 + £5,000) = £115,000. Michael owned the property for a total of 13 years.
Under the new rules, the final 18 months of deemed ownership will be reduced to 9 months. The property was Michael’s only or main residence for three years and therefore this period qualifies for PRR. Additionally, the last 9 months of ownership are also exempt, bringing the total period qualifying for PRR to three years and nine months.
The part of the gain eligible for PRR is therefore:
Total gain (£115,000) x period qualifying for PRR/period of ownership (3.75years/9years) = £33,173.
The remaining £81,827 of the gain (£115,000 less £33,173) is attributable to the letting period and does not qualify for PRR. However, lettings relief will no longer be available where Michael was not in occupation of the property as his only or main residence during the letting period.
Michael’s chargeable gain for CGT will be £81,827.
Married couples and civil partners
Although married couples and civil partners are only allowed to have one main residence between them for the purposes of PRR, when it comes to lettings relief they are treated as joint owners of a property, and each person is entitled to lettings relief in full (effectively giving married couples and civil partners double the relief).
As from April 2020, lettings relief will only be available to people who were sharing occupancy of a property, as their main home, with a tenant throughout the period of letting. This will affect most people who rent out a property, causing them to lose this double relief, and will make more of the capital gain on their property assessable to CGT.