Capital Gains Tax (CGT) and Principal Private Residence Relief: Navigating the Changes

The Capital Gains Tax (CGT) has seen significant changes that impact taxpayers, especially with the annual exempt amount for the fiscal year 2024/25 being reduced to £3,000. 

This reduction, of the annual exempt amount for the fiscal year 2024/25, has brought an additional 260,000 individuals and trusts within the scope of CGT.

For residential property disposals, the 60-day reporting requirement and the rules for principal private residence relief (PPR) present new challenges. The penalties for non-compliance are substantial, with interest rates for late payments at 7.75% per annum, and penalties ranging from £100 for late filing to £300 or 5% of the tax due for prolonged delays.

Key Points to Remember:

• The payment reference for the 60-day tax payment should be a 14-digit number starting with 'X', found in the taxpayer's online UK property account or in a letter from HMRC after submitting a paper return.
• Payments made using the unique tax reference (UTR) into a self-assessment account may lead to allocation issues that are not easily reversible.
• Penalties for late filing start at £100 and can escalate to £300 or 5% of the tax due, with repeated penalties for continued failure after six and twelve months.

 

Basic Rate Taxpayers

As CGT is charged at a different rate depending on whether you are a basic or higher/additional rate taxpayer it is important to understand how this affects those on the basic rate and the interaction with the 60 day report.

• For CGT purposes tax is charged on gains at what is known as the “top slice” of income – after all standard income has been considered. The lower 10%/18% rate is only charged on the amount of basic rate band remaining after calculating tax on normal income.
• A taxpayer with total income (before CGT gains) of £30,270 would, after deduction of personal allowance, have £20,000 of basic rate band left. If they also had a gain (after deduction of the annual exempt amount) of £30,000, the first £20,000 would be charged at the lower rate and the remaining £10,000 at the higher rate.
• When completing a 60-day form for CGT on residential property the form will ask for an estimate of all other income for the year – this is to ensure that gains that take you over the £50,270 threshold are taxed appropriately.
• If you are a self-assessment filing taxpayer this information will be entered onto your tax return for the year and any extra tax to be charged/refunded will be dealt with automatically. However, if you don’t file a tax return you will need to revisit the calculation after the end of the tax year to check if your estimated income was accurate and if not, correct it.

 

Principal Private Residence Relief (PRR):

• PRR (Previously known as PPR) may exempt a taxpayer from CGT if they sell a property they have lived in, but the rules are intricate and may result in denial or restriction of the relief.
• The ICAEW’s Tax guide offers a detailed consideration of PRR, but it was last updated in April 2021, and there have been developments since then.
• HMRC has clarified that for PRR purposes, the period of ownership is generally determined by the completion dates of the property contracts, as stated in their capital gains manual (CG64923).

Additional Considerations:

• To qualify for PRR, the property must have been a residence with a degree of permanence, continuity, or expectation of continuity.
• Documentary evidence is required to support the assertion that a property was occupied as a residence by the claimant.
• If a property has been bought with the intention of realising a gain from its disposal, PRR will not be available.
• The tax rate on residential property gains for higher rate taxpayers has been reduced to 24% for disposals from 6 April 2024.

Taxpayers must be diligent in understanding and applying these rules to avoid costly penalties. It is advisable to seek professional advice or consult updated resources to ensure compliance with the current CGT regulations.

Conclusion: Staying Ahead of CGT Changes

As we navigate the evolving landscape of Capital Gains Tax (CGT), it's clear that staying informed and prepared is crucial. The recent reductions in the annual exempt amount and the complexities introduced by the 60-day reporting requirement and principal private residence relief (PRR) rules have significant implications for taxpayers. With the potential for hefty penalties and interest charges, understanding the nuances of these changes is essential.

Taxpayers must ensure they have the correct payment reference, maintain proper documentation, and be aware of the intent behind property purchases to qualify for PRR. The reduction in the tax rate for higher rate taxpayers on residential property gains to 24% from 6 April 2024 offers some relief, but it also underscores the importance of strategic planning.

In conclusion, these changes to CGT regulations demand a proactive approach. Taxpayers should seek professional advice, utilize updated resources, and engage with tax authorities to ensure compliance and optimize their tax positions. By doing so, they can mitigate risks and capitalize on any available reliefs or benefits within the CGT framework.

 

August 2024