SDLT holidays: Sun, sea… and CGT?
Monday, 22 March 2021
If you’re looking to sell a residential property in the UK in the near future (which could potentially include your main home) it’s important to consider your exposure to capital gains tax.
With the much-welcomed news in the 2021 Budget, the temporary Stamp Duty Land Tax (SDLT) cut (uplifting the Nil Rate Band to £500,000) will be extended in England and Northern Ireland until 30 June 2021. From 1 July 2021, this will reduce to £250,000 until 30 September 2021, before returning to £125,000 on 1 October 2021.
This will no doubt, and rightly so, inspire many individuals to sell their current properties – albeit main homes, second homes, furnished holiday lets, buy-to-lets etc. – and invest in new property to make the most of the opportunity. With all the pressures of buying and selling, capital gains tax (CGT) isn’t perhaps one of your top priorities, or even a consideration at all! Unfortunately, this could result in avoidable penalties and interest where this obligation is overlooked.
As of 6 April 2020, HMRC introduced legislation that meant when an individual disposes of residential property in the UK and the exchange and completion dates are after 5 April 2020, this must be reported on a CGT return (separate to your self-assessment return) within 30 days of completion where capital gains tax is due. In practice, this timeframe does not provide much wriggle room for typical delays in preparation – where evidential paperwork is hard to obtain, other owners are involved, confirming period of residence, setting up a CGT account etc.
Properties that have never, or have only briefly, been occupied by you personally such as furnished holiday lets, buy-to-lets etc., are likely to incur a capital gains tax liability.
In addition, there are scenarios where you may think your home is exempt from capital gains tax under Private Residence Relief (PRR), but that may not be the case. Common examples would be:
- I have two homes, and live in each one for an equal amount of time, so both must be exempt? Unfortunately not. You may only have one main residence for any one particular period, and where this could be ambiguous, a formal election should be made. Otherwise, this can be very difficult to decipher on a retrospective basis.
- My spouse and I have two houses; I live in one most of the week to be closer to work, and my spouse lives in the other all the time; surely we can have a main residence each? Again, not the case. As a married couple or civil partners, you may only have one main residence between you, and again, a formal election should have been made to document which one this is. The other property could therefore be wholly exposed to CGT.
- I have two lodgers that have their own rooms, but share the communal spaces with me; as the space is still available to me, this wouldn’t affect my entitlement to PRR, would it? Interestingly, one lodger who has a room and shares your communal spaces, would not affect your entitlement at all. However, two or more lodgers, even if they are sharing communal spaces with you, will restrict your entitlement to PRR. However, it’s likely you would be entitled to use Lettings Relief for this period instead; depending on how long the lodgings lasted and the size of the gain, you still might be exposed to CGT.
- The property has always been my main home, even when I lived abroad for six years some time ago; I moved back to my property when I returned to the UK. As I only rented when I was abroad, didn’t my UK property continue to be my only or main home? This is a common misconception; you don’t have to own another property for PRR to be prohibited – purely your lack of occupancy in that particular property can be enough to rescind the relief for that period. However, some periods of absence, that are both preceded and followed by actual occupation of the same property, can entitle you to partial, and even full relief for that time away – known as deemed occupations.
So, if you are looking to sell a residential property in the UK in the near future, get in touch with one of our tax advisors as early in the process as possible; from there, we can guide you through the process confidently.