Moving home? Beware new tax complications
As people and businesses start to return to normal, those who were thinking of a move will be firmly putting this back on the agenda, but some things have changed while we have been in lock-down. Even before the review of capital gains tax promised by the Chancellor, some tax perks have been lost already, warns Vanessa Sanders.
Principal Private Residence Relief (PPR)
PPR is a relief available when individuals dispose of their only or main residence.
PPR eliminates or reduces – if you have not lived there for the whole period of ownership – any gain arising on the difference between the purchase price and the selling price.
But major changes to PPR relief took place with effect from 6 April 2020 as set out below.
Final period of ownership
Previously, there was an exemption from the time-apportioned gain accruing in the final 18 months of ownership. This period has been reduced to nine months, except for those property owners with a disability or resident in a care home, who will remain entitled to a final exemption period of 36 months.
Those who were planning to sell within their final nine to 18 months of ownership prior to 6 April 2020 but who have had to delay due to Covid-19 will be caught by this reduction.
Despite the impossibility of selling a home during the lock-down period, no concessions have been announced concerning the extension of the final period.
This is in contrast to stamp duty land tax (SDLT), when the period allowed is 36 months between disposals of main residences, and a further concessionary period has been announced due to the impact of Covid-19.
Letting relief on PPR
Prior to 6 April 2020, letting relief applied where the only or main residence was let as residential accommodation for part of the period of ownership.
On disposal of the property, owners were entitled to claim a very generous letting relief at the lower of:
The amount of gain attributable to PPR relief ;
The amount of gain arising from the letting;
£40,000.
This relief was in addition to the PPR relief.
Up to 5 April 2020, there was no requirement for the individual owners to occupy the dwelling while let. But for disposals since 6 April 2020, letting relief will be available only for periods when the individual owners have shared occupancy with their tenants.
Reporting requirements
Reporting requirement dates have changed as has the date when the liability to pay the CGT arising on such gains.
With effect from 6 April 2020, any disposal of a UK residential property not wholly covered by an exemption or relief must be reported to HM Revenue and Customs within 30 days of the disposal together with a payment on account of the tax liability. This includes a disposal of a PPR where the PPR relief is not 100% of the gain.
However, there has been a soft landing on penalties for failure to report until 31 July 2020 because of the current pandemic. The penalties are £100 for the first six months, but interest runs on the tax owing from 6 April 2020.
It is not a straightforward report that can be made direct through a tax agent, because the individual must first register for a digital tax account and then authorise their agent to make the disclosure on their behalf.
All of this takes time, which is not on the taxpayer’s side. This is the case even if the residual gain is small and results in minimal tax liability.
There are different ways that you either can or must report your capital gains depending on:
Whether you are resident or non-resident;
Whether you are in or out of self-assessment;
The level of gain and how much of your annual exemption you have to cover any gain.
But to ensure the correct amount of tax has been applied – 18% for basic-rate taxpayers and 28% for higher- and additional-rate payers – it is easiest to use self-assessment.
Calculation of PPR relief
The amount of PPR relief deductible before any letting relief is calculated by multiplying the gain by the period of occupation over the total period of ownership.
The individual’s period of occupation can be actual or deemed occupation. Deemed occupation are periods during which the individual is absent from the property, but for PPR relief purposes is treated as living there.
In addition to the final period of ownership set out above, examples of deemed occupation periods include:
Delay in taking up residence
From 6 April 2020, where an individual has purchased a property but is unable to move in immediately due to the completion of construction/alterations/decorations or a delay in selling their previous main residence, this would qualify as a period of deemed occupation, provided this period does not exceed 24 months and the individual immediately moves once the reason for the delay ends.
Given the reduction in the final period from 18 months to nine months, it is now beneficial to remain in an existing main residence until it is sold rather than moving to the new property, as this extends the overlap period in which two properties are owned and full PPR relief is available from nine months to 24 months.
The following periods of absence must be preceded and followed by a period of actual occupation to qualify as deemed occupation.
Abroad by reason of employment
If an individual has been absent to perform duties of employment overseas, this period will be deemed occupation. There is no time restriction on this.
Reason of employment
If an individual has been absent due to conditions imposed by their employer, requiring them to reside elsewhere, this period would also be a deemed occupation although it has a limit of four years.
Any period of absence
Any absence not exceeding three years is considered a period of deemed occupation.
Vanessa Sanders (right) is a partner with accountancy, finance and tax advisory medical specialists Stanbridge Associates Ltd