From 6 April 2020, people who sell a property, apart from their principal residence, will have to pay capital gains tax (CGT) within 30 days instead of the current 22 months.
The measures are part of a swathe of changes to property tax, particularly affecting buy-to-letters and those with more than one property, say a holiday home or investment property, which come into force from 6 April 2020, the new tax year 2020/21.
None of these measures have been deferred or affected by government announcements on covid-19 so it is important to ensure all property tax compliance rules are followed [see Capital gains tax property changes from 6 April and have not been deferred during the covid-19 pandemic.
Many were first announced by former Chancellor George Osbourne back at Summer Budget 2015, including the gradual removal of mortgage interest relief for buy-to-letters and second home owners, and there has been a long lead time to prepare for the changes.
At the time, there was huge pressure on the government to deal with escalating property prices, the reason many of the measures were taken to curb the buy-to-let market and create a fairer environment for first-time buyers struggling to get on the property ladder.
Prior to April 2017, finance costs paid on a buy-to-let mortgage were fully eligible for tax relief. Following changes introduced in 2017, tax relief for finance costs has been gradually phased out and this April will see the relief fully replaced with a 20% tax credit. This can adversely affect the profitability of many rental properties.
There is some relief for property owners during the coronavirus pandemic with a three-month mortgage payment holiday for residential and buy-to-let landlords, who were included in the scheme ‘to ease the financial burden on landlords so as to help them accommodate tenants who cannot afford their rent payments’.
Commenting on the impact of the changes to mortgage interest relief, Zena Hanks, partner at Saffery Champness, said: ‘Once the deduction for finance costs is fully replaced with a 20% tax credit on 6 April, those landlords with large mortgages will face significantly higher income tax bills.
‘If they have a variable rate mortgage with the recent decrease in interest rates, moving forward the mortgage interest costs will reduce, as will the 20% tax credit, but that won’t help the tax liability that will be due for the 2019-20 tax year.
‘Many landlords may have been relieved to hear the Chancellor’s plans for extending the so-called mortgage payment holiday to buy-to-let mortgages, however they should not let this holiday lure them into a false sense of security.
‘All holidays must end, and when the three months is over, and assuming it’s not extended any further, landlords may find the tax bills on their rental profits significantly higher than they were in 2019/20 as the April 6 changes begin to bite.
‘With the interest rate currently at a historic low of 0.1%, many landlords with a variable rate mortgage may not initially notice much of a dent in their finances from the change to the mechanics of the tax relief.
‘Much like the mortgage payment holiday, we can be sure that this unprecedentedly – low interest rate will not last, so landlords should look to pay their mortgage bills sooner rather than later to fully utilise this period where the cost of borrowing, even for a buy-to-let mortgage, is almost zero.’
30-day CGT payment deadline
The introduction of the 30-day deadline to pay capital gains tax (CGT) has already been delayed once due to various confusions. However, this will come into force from 6 April.
HMRC trials online CGT payment system for 30-day change published 13 Feb 2020
It is worth noting that the change also affects divorcing spouses giving property to each other and individuals giving property away. Under these circumstances there will be no sale proceeds to pay the CGT and it is, therefore, crucial that individuals ensure that they are in a position to pay the CGT liability prior to giving the property away.
Tom Gilman, private client partner at law firm Royds Withy King, said: ‘From 6 April, all CGT liabilities will need to be settled in just 30 days of completion of a sale. That leaves very little time to calculate the tax to be paid, report the gain, and pay tax. It is likely to catch many second homeowners and investors short.’
‘The CGT rates for property will remain the same at 18% for basic rate taxpayers and 28% for higher rate taxpayers.
‘Individuals will need to determine which threshold they fall under at the point that the CGT liability arises and make adjustments by self assessment, the following January, if necessary.’
The CGT allowance will increase from £12,000 to £12,300 for individuals and representatives, and from £6,000 to £6,150 for trustees of settlements.
‘Late payment of CGT will leave individuals facing an immediate £100 fine from HMRC, plus an additional £10 a day up to £900. If still unpaid after six months, the liability increases to 5% of the tax due or £300, which is ever the greater,’ Gilman added.