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Should you sell your property before Capital Gains Tax changes take effect?

Landlords selling their properties could find themselves with a heftier Capital Gains Tax (CGT) bill than they expected, due to changes to the system coming into effect in April. Andrew Parker, auctioneer and managing director at SDL Auctions, explains the changes, how they could affect you and what you can do to mitigate your liability.

There are three main changes coming to Capital Gains Tax (CGT) on 6 April 2020 so, if you’re planning on selling any of your properties this year, the easiest way to mitigate your liability is to do so before the changes come into effect. As long as you exchange contracts before 6 April, your CGT will be calculated under the more favourable current rules.

Capital Gains Tax is a tax on the profit you make on an asset such as a property which is not your main home. Put simply, if you buy an investment property for £150,000 and sell it for £250,000, you will usually have to pay CGT on the £100,000 profit you have made.

You get a £12,000 CGT allowance per year and reliefs may be available, too. It’s a complex tax with many considerations, so it is always worth consulting a specialist tax advisor who is experienced in this area.

Among the upcoming changes are three which are most likely to affect landlords and investors:

CGT payments must be made within 30 days

This change affects everyone liable for Capital Gains Tax. Currently, payment isn’t due until 31 January of the year after the gain was made, giving you a maximum of 21 months to pay.

For capital gains made on or after 6 April this year, the bill will be payable within just 30 days of the completion date, with a penalty and interest payable if you miss the deadline.

Take a look at the difference just one month could make:

• Exchange in March 2020: you’ll have until the end of January 2021 to pay – a total of 10 months.
• Exchange in April 2020: you’ll only have 30 days to pay.

Want to sell a property before the Capital Gains Tax changes come into effect? To request a free, no obligation auction valuation, please click here or call 0800 304 7879.

Changes to CGT relief

These changes will only affect you if you have lived in a property you are now letting. If you have never lived in the property you’re selling, these reliefs are not currently available to you so the changes are irrelevant.

Private residence relief
If a rental property was previously your main home, you are entitled to private residence relief (PRR) for your period of occupation, with the final 18 months of ownership always qualifying for PRR, regardless of the property’s use.

For example, if you have owned a property for 10 years (120 months) and lived in it for the first year, you can currently claim relief on a total of 30 months (12 months of residence plus a further 18 months). This is 25% of the ownership period so would reduce the taxable amount of a £100,000 capital gain to £75,000.

On 6 April 2020, the final PRR period will be reduced to nine months, so relief in the above example could only be claimed on 21 months, reducing the CGT bill by 17.5% instead of 25%. This would mean £82,500 of a £100,000 gain would be taxed.

Lettings relief
Lettings relief can also be claimed if you have lived in the rental property you are selling and is worth a maximum of £40,000 per person per property. Without going into detail as it is quite complex, this could reduce the tax liability on the above example by a further £25,000 – meaning the seller would now be taxed on £50,000 of the gain.

However, from 6 April, lettings relief will no longer apply if you share occupancy with a tenant, such as if you rent a room to a lodger.

These changes mean selling a property on or after 6 April 2020 could cost you much more in Capital Gains Tax – and you’ll have less time to pay the bill, too. Therefore, if you’re planning on disposing of any properties this year, you could be wise to act sooner rather than later.

We have eight room auctions before April and online auctions can be run at any time, so why not get in touch today to request a free auctions valuation? To find out more, click here or call 0800 304 7879.