Capital Gains Tax (CGT) of residential property disposals has changed greatly in the last seven years. Although UK residents have for many years had to declare a capital gain where this is over the annual exemption, the latest change requires that from 6 April 2020 all Capital Gains are to be reported and all tax settled within 30 days of property completion.

When a residential property is disposed of it is the seller who is responsible to make the declaration when appropriate.

Situations where a declaration or tax return will not be required

Where no gain has been made – the proceeds are less than the purchase price of the property. It may still be tax efficient to declare the loss, this could offset gains on future sales of other property such as shares.

Where a loss from a previous tax year is brought forward, this could eliminate or reduce the current gain.

The gain is below the annual exemption, which is £12,300 for the 2020/2021 tax year. Where possible a spouse transfer may mitigate the tax due and provide a second annual allowance. Transfer must be made before the sale and must consider the stricter Private Residence Relief (PRR) rules below first.

The gain may be covered by PRR. This applies where the seller resided in the property as their main residence for the duration of the ownership.

Changes to Private Residence Relief from 6 April 2020

In the 2019/20 tax year, PRR allowed for 18 months tax relief at the end of the ownership period. The purpose is to give the owner some freedom from main residence rules to purchase a second property whilst awaiting the sale of their first property. From 6 April 2020 this period is reduced to nine months.

Contained within PRR is ‘Letting Relief’. This allowed a relief of up to £40,000 per tax year if the owner qualified for PRR but later leased out the property. From 6 April 2020 the only letting relief available is to those who are in shared occupancy with the tenant.

Stricter rules will apply with regard to the PRR being automatically inferred between spouses. Previously a receiving spouse could claim the same PRR as the transferring spouse regardless of when the receiving spouse occupied the property as their main residence. The receiving spouse can then count any period where the residence was occupied as a main residence by their spouse as their own.

The new rules allow this only if the receiving spouse occupied the property as a main residence at the time of transfer. If they did not occupy the property at the time PRR is counted form the date the receiving spouse actually moved in. 

How to report a Chargeable Gain

The most common way to report a gain in the past has been the annual self-assessment tax return. The deadline for completing an annual tax return online and payment of tax is 31 January following the end of the tax year. Although all disposals must still be reported as normal in the individual’s tax return, if they are currently on the self-assessed regime, all individuals must now also report the gain in the new online system set up for this purpose known as the ‘Real Time Capital Gains Service’. This must be reported and tax paid within 30 days of completion of sale.

If you are unsure whether this new rules may affect you or if you would like further information or assistance on how to report the taxable gain please do not hesitate to contact our Arlene Robertson, Law Accountant  (01224 332400, Arlene.robertson@raeburns.co.uk)

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