A major change will come into force from 6 April 2020 over the way in which capital gains on residential property disposals will need to be reported to HMRC, with a return and tax payment being necessary within 30 days of the disposal.
In addition, other changes will remove valuable reliefs relating to the disposal of residential property where this is, or was, the owner’s home. Whilst some owners may be better off under the new rules, the majority will be worse off, particularly where the property is now let out; taking immediate action pre 6 April 2020 may help to preserve valuable reliefs.
Main residence relief (MRR)
The last 18 months of ownership of a property which has, at any time, been used as your main residence are currently automatically covered by MRR, exempting that part of the gain from capital gains tax (CGT), whether you live in it during this period or not, giving property owners a ‘deemed period of occupation’. This final period exemption is reducing to only 9 months where the disposal takes place post 6 April 2020. For those in care homes or disabled persons, the final period exemption remains at 36 months.
The main aim of MRR is to cover situations where a new property has been purchased, but there is a delay in selling the old property. The relief was previously 36 months for all, and so the reduction is a further blow to property owners.
Job related accommodation provisions extend deemed periods of occupation in certain circumstances and the relief will be extended for MOD workers.
Where a property has at some time been used as your main residence, a further relief is currently available from CGT where the property has also been let during the ownership. The relief amounts to a maximum of £40,000 per owner (i.e. £80,000 where the property is owned jointly by two individuals), and can significantly reduce a tax bill on disposal.
From April, this relief will only apply where the owner of the property has been in shared-occupancy with the tenant i.e. let a room or part of their house whilst they continue to live in the property.
This will have a major impact on those who have let out the whole of their former main residence to tenants as there will be no transitional rules and the relief will simply disappear for those who were previously entitled.
Spouse/civil partner transfers
Transfers of assets between spouses or civil partners are deemed to take place at ‘no gain/no loss’, meaning the donee acquires the asset at the donor’s original base cost. Under current legislation, if a property is transferred to a spouse or civil partner whilst it is being used as the main residence of the couple, the ownership history of its use as a main residence etc is acquired by the donee. Where the property is not the couple’s main residence, the ownership history is not acquired and so, even if the property has previously been a main residence, no relief may be due on a subsequent sale.
From April, where an individual transfers all or part of an interest in a residential property to their spouse or civil partner, the recipient will inherit the transferring spouse or civil partner’s previous history of use of that property in all circumstances.
Extra Statutory Concessions (ESC)
ESC D49 allows an individual to claim main residence relief where there is a delay between a property being acquired and it actually being lived in as a main residence in certain circumstances. This will be legislated so that individuals will be able to claim MRR where there has been a delay of up to 24 months in taking up residence in a property where it is being built, renovated, re-decorated etc.
It was held in a recent tax case [Desmond Higgins and the Commissioners for Her Majesty’s Revenue and Customs,  EWCA Civ 1860] which went to the Court of Appeal, that for the purpose of calculating the period of ownership for MRR, ownership is deemed to start when the contract for purchase of a property is completed, not when contracts are exchanged. This will protect individuals who buy a property off-plan which then takes several years to be completed, as completion of the purchase will not normally take place until the property is ready to move into. We are yet to see whether HMRC will appeal the outcome of this case.
What action do I need to take before 6 April 2020?
If you are intending to dispose of a residential property which has, at some point, been used as your main residence, you should review your current CGT position and what impact the new legislation and changes to residential property relief will have on you. In some circumstances, the new rules may be more beneficial, but in most cases, they will not be.
You may therefore want to bring forward any planned disposals, or to ‘force’ a disposal to crystallise the reliefs currently available. This may include a disposal to a spouse, civil partner or family member, or potentially to a trust or company. It may also be possible to use a carefully drafted rescindable contract (a contract which can be declared void by mutual agreement of the parties so that they are put back in the position they would have been in had the contract not been made).
If you would like to discuss any of the changes in more detail, please do get in touch with Tara as soon as possible.