The capital gains tax (CGT) position on homes is changing from 5 April 2014. The relief which ensures that the last three years of ownership is CGT free is being halved, so if you lived in your property in the past but have moved out at some point, this change could mean that you pay more tax on any profit when you eventually sell.
At present, where a person owns property that has been their home at some stage, they will be treated as though they still lived in that property for the final three years of ownership, even if they have moved out and, for example, let the property for a few years. The three year deemed ownership period is reducing to 18 months with effect from 6 April, which will ltimately leave many second home owners with a significantly higher CGT bill if they sell after 6 April.
To work out what the impact will be in any situation you need to understand how the CGT calculation works.
Broadly, you look at the period of ownership and split it according to whether it qualifies for relief or not. Supposing that you:
- Purchased a property for £200k on 1 January 2004
- Sold the property for £450k on 1 January 2014
- Lived in the property for the first five years that you owned it, and then moved out and let it for the next five years
The five years of actual occupation qualifies for relief and, for a sale pre 6 April 2014, the last three years do too, so that’s eight years out of 10 altogether. This means that 8/10 of the gain is tax free leaving 20% or £50k in charge to tax – a tax bill of £14,000 (although this might be less with lettings relief and annual exemption).
However, if you sell after 6 April, that three years of ‘free’ occupation goes down to 18 months. So, if you had bought the property on 1 May 2004 and sold on 1 May 2014, then, instead of 8/10 of the gain being tax free, only 6.5/10 would be relieved. The result is that, in the absence of other reliefs, CGT will be charged on £87,500. So, at 28%, the tax bill works out at £24,500 (although again, this might be less with lettings relief and annual exemption).
Fortunately there may be other reliefs available depending on your particular circumstances and we are well placed to advise on the impact of these changes for you and the appropriate claims to make. In these situations the passing of time works against the property owner because the longer the period of ownership, the smaller the portion that qualifies for relief will be. So in some cases it may even be worth acting now to crystallise the gain with the exemption for three final years of ownership, although care is required to ensure that the benefits aren’t outweighed by Stamp Duty Land Tax or other charges.
Quick action is required to consider all the possibilities so if you would like to consider your own position, please speak to your contact partner or to our tax partners Clare Munro or Phil Moss who can help you navigate through the rules.