There is a radical change in the tax system from April for second homes that has not been widely publicised.
From 6 April 2020, clients who sell a second property and makes a gain will have to pay the tax owed within 30 days of the completion of the sale or disposal – as opposed to a potential 21 month window currently.
This will be deemed a “payment on account” provided it can be demonstrated that reasonable care has been taken in the calculation. If additional tax is due at the point of filing the full self-assessment penalties will not be incurred.
The process will be via submitting the Capital Gains Tax (CGT) computation of a self-assessment return relating to residential property sale.
You will be allowed to deduct costs involved with buying and selling the property – such as solicitors /estate agents’ fees, stamp duty when buying the property. In all cases receipts are required to be included in any calculations.
Cost associated with the upkeep or financing of the property whilst owned are excluded.
Residential Letting Relief is also being overhauled. In the past if you let your property a calculation could be made based on the period of total ownership against the period when it had been let. A relief up to a maximum of £40,000 per original owner was available. From the 6th April this relief will only be available if you shared the property with your tenant.
Private Residence relief will also be amended. A quirk in the current rules means HMRC allows an individual to avoid paying CGT for the final 18 months of ownership – even if the property was being let, or empty. But the property must have been occupied as the person’s main residence at some point.
The ‘final 18 months exemption’ was a common sense fix to the uncertainty of selling a home. It meant individuals would not accidentally fall into the capital gains tax regime, if, for example, they were having problems finding a buyer. From 6 April 2020, HMRC have decided to cut the final 18 months exemption in half, to just nine months.
CGT on property is 18% at the lower rate and 28% at the higher rate. Clients need to be aware that even if they are a lower rate taxpayer only that element of the property gain that remains within the lower band is taxed at 18%. Any amount above will be subject to 28%.
The calculation therefore required will need to consider all income in the Fiscal year to demonstrate “Reasonable Care” and as such may be challenging.
We can assist you in this process and will provide a fee quote on request which will take into account number of owners, timeline available until the 30-day window lapses, along with other worldwide income. We will produce a full return to establish the gain and tax bands applicable. This process will enable us to demonstrate reasonable care on your behalf.
We can also discuss options to mitigate the CGT if applicable.