In our article earlier in the year, we explored the tax implications of the proposed two main changes to Principal Private Residence Relief and Lettings Relief.
There is now less than five months to go before the new rules are introduced on 6 April 2020, subject to the outcome of the consultation on the draft legislation that ended on 5 September 2019 (and any further governmental developments!). Although the proposed changes should obviously not be the sole reason why an individual sells a property, time is rapidly running out for taxpayers who want to sell their properties to take advantage of the current more generous Principal Private Residence Relief and Lettings Relief; the latter being worth up to £11,200 per taxpayer.
For Capital Gains Tax purposes, the crucial date to consider is the date of exchange of contracts, rather than date of completion. This is something that frequently gets overlooked but is very important if dates of exchange and completion straddle two tax years, for example if contracts are exchanged on 30 March 2020 but completion on a property does not take place until two weeks later on 13 April 2020.
In these circumstances, the disposal would need to be reported on a 2019/20 tax return and the existing Principal Private Residence Relief and Lettings Relief rules would apply. Any tax payable would be due by 31 January 2021.
If contracts were exchanged just a week later on 6 April 2020 and completion still took place on 13 April 2020, the disposal would fall into the 2020/21 tax year and the taxpayer would only be entitled a 9 month final exemption period for Principal Private Residence Relief and would most likely miss out on Lettings Relief entirely.
In previous tax years, the postponement of exchange of contracts until after the 6 April would also delay the payment of any Capital Gains Tax by a whole year. However the introduction of the ‘Residential Property Return’ from 6 April 2020, which needs to be submitted within 30 days of completion together with a payment on account of the Capital Gains Tax due, will make such planning ineffective and advances the payment of Capital Gains Tax for all taxpayers.
It is not all bad news. When an individual transfers all or part of a residential property they own to their spouse or civil partner, it is proposed that from 6 April 2020, the receiving spouse or civil partner will inherit the entire ownership history of the property, regardless of whether the property is their only or main residence at the date of transfer. This proposal could, in the right circumstances, save tax for some taxpayers although it will increase the liability for others. Where any transfers of property between spouses or civil partners is being considered, tax advice should always be sought.