The clock is ticking: time to sell?

25 January, 2019

As we highlighted in a blog last November (see here), the rules about tax relief on increases in value of residential property are set to change in April 2020.  The difference between selling on 5 April 2020 and 6 April 2020 could be a much bigger hole in your pocket!

Currently, if you buy a property, live in it as your main residence and then sell it, any increase in value is exempt from capital gains tax because of ‘principal private residence relief’(subject to some limits e.g. extensive gardens and outbuildings aren’t always included).

Plus…

  • Even if you move out before selling, the ‘final period relief’ means the last 18 months before the sale qualify for relief from capital gains tax even if you are not living in the property, and
  • If you let the property for some of the time, ‘lettings relief’ means that up to £40,000 of any increase in value (£80,000 for jointly held property – up to £40,000 each) is also disregarded

From April 2020, the ‘final period relief’ is reduced to the last 9 months before sale and lettings relief is withdrawn entirely unless you continue to live in the property with a tenant.

The implications of this are illustrated below:

SALE ON 5 APRIL 2020

SALE ON 6 APRIL 2020

Purchase price March 2015: £200,000

Purchase price April 2015: £200,000

Sale price March 2020: £600,000

Sale price April 2020: £600,000

Gain: £400,000 (average of £80,000 per year)

Gain: £400,000 (average of £80,000 per year)

   

Use:

  • Lived in for 3 years
  • Let the full property for 2 years

Use:

  • Lived in for 3 years
  • Let the full property for 2 years
   

Lived in for 3 years as main residence. Gain of £240,000 is covered by principal private residence relief.

Lived in for 3 years as main residence. Gain of £240,000 is covered by principal private residence relief.

Let the property for 2 years. Gain of £160,000. £40,000 of this covered by lettings relief.

Let for 2 years. No lettings relief available against gain of £160,000.

Last 18 months, though not lived in by the owner, also benefits from the final period relief so a further £120,000 is not liable to tax.

Last 9 months, though not lived in by the owner, benefits from the final period relief so £60,000 is not liable to tax.

TAX POSITION

TAX POSITION

Total gain qualifying  for relief: £400,000

Taxable gain: £0

Tax payable (at higher rate of 28%): £0

Total gain qualifying  for relief: £300,000

Taxable gain: £100,000

Tax payable (at higher rate of 28%): £28,000

The relevant date for capital gains tax is when you exchange contracts.  Selling property can take time, particularly in the current climate, so if you are thinking of selling in the next year or two, keep in mind that it could be very worthwhile exchanging before 5 April 2020!

To find out more about this contact Tessa Cumming-Bruce on 01892 506 225 or email tessa.cumming-bruce@crippspg.co.uk