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Home owners may need to sell quickly to avoid CGT, warns tax expert

Home owners may need to sell quickly to avoid CGT, warns tax expert

The clock is ticking for a large number of property owners who, says a tax expert, should get on and sell their homes quickly to avoid having to pay Capital Gains Tax.

Last week, the Chancellor announced cutting the time that an owner who no longer lives in their last home can hang on to it before incurring CGT.

On April 6, the period will be cut from three years to 18 months.

The three-year exemption was introduced during the worst of the downturn, intended as a “bridging” aid to help people move between two homes. Now that the market has picked up in much of the UK, Osborne clearly thinks that 18 months is enough time to sell a home.

However, the implications are major. It will affect many people who could currently be clients of letting agents, but who have yet to instruct a sale. Or have instructed a sale – but not just yet.

The group that could be affected includes: those renting out their previous homes; couples who have moved in together but have retained one of their properties; those who have moved to a new home but not yet sold their old one; those who have moved abroad but kept their UK home as a source of rental income for a period; those who have held on to a previous property as a second home; people who have relocated because of a job; and those who were planning to market a home in the spring rather than in the depths of winter.

From April 6 onwards, if they still own but have not lived in their former home for 18 months, but then go on to sell it even that day, they will be hit with a tax bill (although see Note 1 below).

It means that a number of property owners will only have a very short window –  under five months – to sell up and escape the tax altogether.

It also means that those who might have been planning to rent out their home for a while rather than sell might want to rethink their plans.

Tax manager Nimesh Shah, of London accountancy firm Blick Rothenberg LLP, says that while the Chancellor’s announcement on making foreign owners of UK property pay CGT captured headlines, halving the exemption period for main UK residence relief will have far more impact.

It could generate almost three times as much revenue, he said.

Shah said: “The Government estimates that halving the final period exemption will raise £360m over the next five years, whilst extending CGT to non-residents will raise only £125m. These figures have come from the Government’s own fiscal impact assessment.”?

He added: “ There will no doubt be a flurry of house sales by UK resident taxpayers before April 6 for those properties that will by then have been owner-unoccupied for more than 18 months. 

“It doesn’t give people much time to market their property for sale, instruct solicitors and ultimately sell their property.  ? ?

“Also, people who have two homes on a temporary basis (because, for example, they have moved into a new home as a result of a job relocation or family reasons) will have to walk the tightrope between selling their old property early to mitigate an unwelcome CGT charge and paying any early mortgage redemption penalty in the process, particularly if they are on a fixed rate.”

Shah told EAT: “We don’t know yet exactly how this will work as the draft legislation hasn’t been released yet, but our understanding is that the change is effective from April 6, so you could say it will be ‘backdated’.”

We put a number of scenarios to him, including a property owner who had not lived in their home for two years and had planned to put it on the market next spring, and a landlord who has only just renewed a tenancy agreement on what was their main home and had perhaps planned to sell at the end of it.

He said: “My view is that they should definitely try and sell the property before April 6, 2014. If they can’t sell it until after April 5, only the last 18 months would be exempt under the new provisions.”

He said that “sell” for Capital Gains Tax purposes generally means the day that contacts are exchanged. (However, see Note 2.)

NOTE 1: Capital Gains Tax is complicated and vendors and landlords likely to be caught by the change should be advised to take their own tax advice as soon as possible – ideally after the new draft regulations are published, possibly later this week.

However, it is important to note that CGT is generally calculated on a time apportionment basis. To keep it as simple as possible, here is an example provided by Nimesh Shah.

Someone bought a property ten years ago, lived in it for five years, but did not live in it for the five years before selling.

Under the current CGT rules, the last three years are exempt, and the taxable capital gain is two-tenths of the overall gain.

Under the new rules, where only the last 18 months are exempt, the taxable capital gain is 3.5/10ths.

If someone sells a property under the new rules 18 months and one day after moving out of it, it is the one-day over the total ownership period that is taxable. That does not sound too scary but the tax bill mounts for every day, week, month and year after that.

NOTE 2: For CGT purposes “sale” generally means the day contracts are exchanged.

However, the exact rule is that if the sale of an asset is made under an unconditional contract, the date of disposal is the date of the contract.

If the contract is conditional, the date of sale is when the conditions have been satisfied.