Residential property owners have had their fair share of tax changes to contend with in recent times. However, there is a further matter on the horizon which I don’t think has been particularly well publicised. This concerns a fundamental change to the administration of Capital Gains Tax for sales or other disposals of UK residential property.
From April 2020, individuals, trustees and personal representatives, realising a taxable capital gain from the sale or other disposal of UK residential property will need to make a payment on account of any capital gains tax due. This will need to be paid within 30 days of the completion of the disposal. The changes mainly affect those selling a second home or rental property on which private residence relief is not available. They will apply to UK residential properties, even where the property is gifted for no consideration.
Where a disposal is made, a return must be made within 30 days of the date of disposal (using the completion date rather than exchange of contracts as the trigger date even though exchange of contracts is the date of sale for CGT). No returns are required for no gain/no loss disposals and for disposals where no tax is due. The return must include information to be specified separately and a declaration by the person making it that the return is to the best of the person’s knowledge correct and complete.
The normal 12-month period is allowed for amending the property return, but only for events that had already occurred at the date the property return was filed. If for any reason you make a capital loss after this date, then you have to claim relief for this loss on your self-assessment tax return, so you may effectively be paying tax which is not actually due, and you cannot claim a repayment of this tax until you file your self-assessment tax return.
As any property gain will also be included on your self-assessment tax return, as well as the property return, then if the self-assessment tax return is subject to an enquiry, then the capital gain is potentially too, so the enquiry window remains open for longer.
If a property is owned jointly it will be necessary for each owner to complete a return in this regard.
An anomaly with the reporting of a disposal occurs if you exchange contracts pre 5 April 2020, but completion happens a few weeks later after 5 April, then you will fall within both the old rules and new rules. Your 2019/20 self-assessment tax return will include the disposal as the date of exchange determines the reporting year. The CGT would normally be payable by 31 January 2021, but you will need to make the payment within 30 days of the sale completion date, if this is sooner. This earlier date is always likely to be the case.
Payment of tax on account
Tax must be calculated and paid on the disposal, ignoring any other CGT disposals which are not subject to these rules. The tax is due on the date that the return is due, that is, 30 days after the disposal. The tax is referred to as an amount notionally due. The amount paid is referred to as a payment on account of the CGT for the year.
Available capital losses can be offset if desired. Where there is more than one disposal in a year, the tax is calculated on the second disposal, taking into account the first disposal and deducting the tax paid at that time from the total amount due. This means that the cumulative amount of CGT due under these provisions is calculated each time a disposal is made, and the net tax due or overpaid is due for payment or refund.
Note that these are merely interim payments of CGT and the final calculation of the total CGT liability will be performed, as usual, through the self-assessment system (for the time being).
Penalties for late CGT tax returns
There is an initial penalty of £100 if the return is submitted more than 30 days after completion.
If it is more than 3 months late, daily penalties of £10 per day will accrue over for the following 3 months until the return is submitted, up to an additional £900
Individuals need to be aware that these new rules are coming into force, and although they are aimed at the buy to let market, they can catch an individual’s main residence, if for any reason full main residence relief is not available. This would be such things as periods of absence, divorce, and periods abroad, etc, and in these circumstances, you may have to calculate the capital gains tax position anyway, to check if the property return is required.
It is a very short window to file the return, so individuals need to ensure their records are up to date so that they can provide their accountant with the information very quickly after the completion date.
If you are selling a residential property next year and you are unsure if a capital gains tax liability will arise, or would like us to complete the CGT tax return on your behalf, please contact us.