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How Will Capital Gains Tax Changes Affect Homeowners and Landlords?

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The Government is considering major changes to Capital Gains Tax that could increase tax for many homeowners and potentially transform the property market. On 13 July 2020, the Chancellor wrote to the Office of Tax Simplification (OTS) asking it to conduct a review of the tax regime. Some experts suggest that the review will prompt landlords, investors and homeowners to leave the market early to avoid the risk of a significantly increased tax bill.

The review also comes in the wake of other significant changes such as cuts to Entrepreneurs’ Relief and the introduction of a 30-day deadline for filing a Capital Gains Tax Return upon selling residential property.

The Treasury says that, “It is standard practice to keep taxes under review”. However, some commentators say there is nothing standard about this particular review. With the Covid-19/Coronavirus pandemic continuing to batter the economy, the country has seen record levels of public spending to support individuals and businesses. Capital Gains Tax from the sale of residential properties could help the Government recoup some of this cash.

Others suggest that simplifying the Capital Gains Tax regime could be a blessing in disguise, particularly for small businesses, individuals and accidental landlords who are often caught out by confusing tax rules.

What is Capital Gains Tax?

Capital Gains Tax is a tax payable on the profit made from disposing of an asset (such as property and shares). ‘Disposing of an asset’ typically means selling it, however, it can also mean giving the asset away as a gift or swapping it for another asset.

The tax does not affect main homes so it only accounts for about 1% of the tax paid in the UK – it primarily affects buy to let landlords and property investors. People who have second homes, holidays homes or people who previously lived in a home they let out can also be affected (although there is some tax relief available for the latter category of seller).

The rate you pay depends on various factors such as income and the profit made on the asset. For basic rate tax payers selling residential property, the Capital Gains Tax rate is usually 18% of the gain (not the overall value of the asset). For higher rate taxpayers, the rate is 28%.

The current tax allowance for Capital Gains Tax is £12,300 (it increased from £12,000 in April 2020).

How has Capital Gains Tax changed in 2020?

Capital Gains Tax has already changed significantly this year with major implications for some homeowners, particularly small-scale and accidental landlords. The main changes to Capital Gains Tax on property are:

Private Residence Relief period reduced from 18 months to 9 months

Prior to April, so long as a property had been the owner’s primary residence at some point during their ownership, the last 18 months of ownership were always tax-free. From April, this tax-free period has been halved to 9 months.

Lettings Relief now only available to landlords in shared occupancy

Prior to April, where a property was eligible for Private Residence Relief the portion of ownership when the owner did not live in the property could be eligible for Lettings Relief of up to £40,000 (or £80,000 for a couple). From April, only landlords who live in shared occupancy with their tenants can claim Lettings Relief.

Capital Gains Tax must now be paid and reported to HMRC within 30 days of sale

You must now report Capital Gains Tax twice – first, you must pay any tax and file a tax return with HMRC within 30 days of a sale of residential property; second, you must declare the tax on your Self-Assessment tax return within the relevant tax year.

The tax-free allowance has increased

The Capital Gains Tax allowance is now £12,300 or £24,600 for spouses and civil partners.

Capital Gains Tax review 2020 – what else could change?

On 13 July 2020, the Chancellor, Rishi Sunak, wrote to the Office of Tax Simplification (OTS) asking them to undertake a review of Capital Gains Tax and ensure the system is ‘fit for purpose’. No aspect of the tax regime is safe, including the:

  • Tax-free allowances
  • Exemptions
  • Reliefs

According to the letter to the OTS, the purpose of the review is to assess how Capital Gains Tax interacts with other taxes (such as Income Tax) and whether the current rules ‘distort behaviour’. However, some experts suggest that the main purpose is to raise more tax revenue to pay for the cost of the Covid-19 support schemes such as the Employee Job Retention Scheme (Furlough Scheme). Since the Government pledged in their manifesto not to raise National Insurance, Income Tax or VAT, raising Capital Gains Tax is the obvious choice to raise some quick cash without breaking their promises.

Ultimately, there are three main ways the Government can raise further revenue from Capital Gains Tax:

  • Raise the rates (the current maximum rate for residential property is 28%)
  • Reduce allowances (currently, the tax-free allowance for Capital Gains Tax is £12,300)
  • Remove tax relief or increase/introduce Capital Gains Tax on other types of assets (for example, main residences)

One suggestion is that the rates of Capital Gains Tax will be aligned with Income Tax rates– i.e. at rates of 20%, 40% and 45%. However, until the OTS has conducted its review, we cannot say for certain where the changes will be made.

How could Capital Gains Tax changes affect homeowners?

The vast majority of homeowners will never have to pay Capital Gains Tax due to Principal Private Residence Relief – this is a tax relief on your main home where you and your family live (as opposed to, for example, a property you rent out to tenants).

From a political perspective it seems unlikely that the Government will remove tax relief for ordinary homeowners, however, it is not off the table.

How could Capital Gains Tax changes affect landlords?

It is more likely that landlords, property investors and second homeowners will face an increased tax bill. Some experts warn that raising taxes for the private rented sector – which houses around 20% of the UK’s population – could have negative effects such as the mass exit of many landlords from the sector leading to reduced competition and innovation within the sector.

The worst affected are likely to be small-scale and accidental landlords, in particular, landlords who temporarily let out their main residence at some point during their ownership. In April 2020, these people lost their Capital Gains Tax Lettings relief for the years the property was let out and could now be facing further significant tax increases.

Need advice about selling your home or a buy to let?

If you need advice about Capital Gains Tax and your liability if you sell your property, it is advisable to seek independent advice from a tax advisor who specialises in this type of tax.

If you decide to sell, we have a team of highly experienced and independently recognised conveyancing solicitors who can assist you with all the legal aspects. We have handled hundreds of conveyancing transactions over the years, providing advice to homebuyers, sellers, buy-to-let landlords, property investors and more.

Whether you are a homeowner concerned about selling your primary residence or a professional landlord with a portfolio of properties, we are here to help. We are members of the Law Society Conveyancing Quality Scheme for our skills and expertise in this area.

For further information about buying or selling residential property, visit our Conveyancing Solicitors page or get in touch with us and we will be more than happy to answer your questions or provide a quote.