Capital gains tax planning for 2020/21

If you're a landlord or second home owner, it can feel like the tax rules and regulations that apply to you are constantly in flux.

In the past few years, we've seen changes to mortgage interest relief, the introduction of a stamp duty surcharge, a ban on letting fees, and new rules around houses of multiple occupation.

From next year, things are set to change yet again - this time for capital gains tax.

These proposed rules, subject to legislation, could affect anyone selling a residential property that's not their main home after 6 April 2020, so it's important to plan ahead.

Private residence relief and letting relief

When you sell something that's increased in value since you bought it, you may need to pay capital gains tax on the difference in value.

Usually, people selling their main and only home are exempt from this, through private residence relief.

But if you sell a home that you've let out at some point, you may have to pay some tax on the gain, depending on how long you've lived there yourself and if the property has increased in value since you bought it.

Currently, you'll get full relief for the years you lived in the home, plus the last 18 months you owned it. These 18 months are known as the final exemption period.

If a property you let out has been your main residence at some stage, you may also be able to claim letting relief on it.

This allows you to reduce any chargeable gain remaining after private residence relief, by whichever is the lower of:

  • the amount of private residence relief already calculated
  • the amount of chargeable gain made from letting the home
  • or £40,000.

Letting relief is also available per owner, meaning a co-owned property could receive additional capital gains tax relief of up to £80,000.

Changes in 2020/21

From 6 April 2020, the following changes are in the pipeline:

  • Letting relief will only be available to those who share occupation of their house with a tenant.
  • The final exemption period will be reduced from 18 to nine months.

30-day payment window

The other major change to capital gains tax from 2020 applies to anyone who is due to make a taxable gain by selling UK residential property.

At the moment, if you sell a property and make a gain, you'll need to report it through a self-assessment tax return anywhere between 10 and 22 months after the date of sale.

But from next April this will need to be done through a residential property return, within 30 days of the completion date.

Planning tips

If you own multiple properties, make sure you consider the practical effect these tax changes might have if you were to sell one on 6 April 2020 or later.

You should always seek professional advice before making any decisions based on these tax rules, but to start thinking about it, here are a few questions to ask:

  • Which of your properties could the changes affect?
  • How much extra tax would you need to pay?
  • If you have a spouse or civil partner, could you transfer the property to joint names to utilise both annual allowances?
  • Could you dispose of any property that will be affected before the changes take place?

Speak to us about capital gains tax planning.