Tax now payable much sooner following a disposal of residential property

From 6 April 2020 significant changes will be made to the deadline for paying capital gains tax (CGT) and filing tax returns in respect of disposals by individuals and trusts of UK residential property. Taxpayers and advisers need to be aware of these changes now.

UK property disposals prior to 6 April 2020

Previously, UK resident individuals and trusts that sell UK residential property falling within the capital gains regime, were required to report any profit (or gain) they make to HM Revenue & Customs (HMRC) through their annual self-assessment tax return. The individual’s or trust’s self-assessment tax return needed to be submitted to HMRC, along with payment of the CGT due by 31 January following the end of the tax year in which the property was sold. This meant that the period of time between the sale of the property and the date on which the tax needed to be paid could be up to 22 months.

UK property disposals post 6 April 2020

From 6 April 2020, the timeframe in which individuals and trusts have to report and pay any CGT to HMRC is being cut dramatically to 30 days from the date of completion of the sale.

Where land is sold by joint owners, each of the owners are subject to these new rules will need to file a tax return and pay CGT in respect of the disposal of the property. 

Similarly, where the land is sold by a partnership, each of the partners subject to these new rules will need to file a tax return and pay CGT in respect of their appropriate proportion of the gain realised by the partnership.

These changes bring the treatment of UK resident individuals and trusts in line with the 30-day deadline that already applies to non-UK residents disposing of residential property. Given that the scope of CGT was extended to non-residents disposing of UK residential property in 2015 in order to level the playing field, it is a little ironic that this change now seems to be addressing a perceived advantage that UK residents had previously enjoyed over non-residents.

UK companies will continue to report and pay tax on any gains under the corporation tax regime as before and are unaffected by these changes.

The changes only apply to UK property sold on or after 6 April 2020.

Calculating the tax due

The amount of CGT applicable to the disposal of a residential property depends on the taxpayer’s personal circumstances at the time of the disposal. Accordingly, it may not be possible to definitively calculate the CGT due at the time of the sale (given that the liability will depend on a number of factors including the taxpayer’s total income for the relevant tax year, whether any other gains or losses have been crystallised in the tax year and the availability of any personal allowances or other reliefs).

Accordingly, the CGT due within 30 days of the sale will often need to be calculated using a reasonable estimate of the tax payable. In this way, the payment of this CGT is more correctly considered to be a payment on account of the final tax liability in respect of the sale.

This calculation will later be trued-up in the taxpayer’s self-assessment tax return for the relevant tax year (i.e. the tax return due by 31 January following the end of that tax year). In the event that the payment on account proves to be more than the final tax liability, a refund will be due to the taxpayer. Conversely, if the payment on account is insufficient, further tax will be payable.

New online reporting system

To support compliance with the new 30-day deadline, HMRC are launching a new online service to enable individuals to easily report and pay their CGT liabilities.

What property transactions are caught by the new rules

Subject to certain exceptions (see below), the new rules will apply to all disposals of residential properties by UK resident individuals and most trusts. In practice, the rules will therefore most commonly apply to sales of buy-to-let investments, second homes and holiday homes.

When CGT will not be payable and no return offered

• There will be no obligation to pay tax or file a return within 30 days of the sale of a residential property where:
• No capital gain arises on the sale or the transaction results in the taxpayer realising a capital loss;
• The taxpayer has previously realised a capital loss which is available to set against the capital gain realised on the sale of the residential property.
• Any gain realised from the sale is less than the taxpayer’s available personal allowances for the current tax year;
• or A statutory relief is available such that no tax is payable on the transaction. Most commonly, this will include principal private residence relief where the taxpayer is disposing of his/her home.

Notwithstanding that there is no obligation to pay tax and file a return within 30 days, such excepted transactions will likely still need to be reported on the self-assessment tax return due by 31 January following the end of the tax year.

Failure to comply

Failure to inform HMRC of the sale, and pay the CGT due within 30 days, may result in a penalty and interest being charged on the CGT owed.

Recommendation

Given the short period of time to arrange for the filing of a tax return and payment of tax following completion of the sale, we recommend the tax implications of selling a UK residential property are considered at the earliest opportunity and that individuals and trusts seek appropriate advice as to their CGT obligations.