Changes to capital gains tax on residential property

Posted on January 2, 2020
  • Finance Act 2019 brings the liability to capital gains tax (“CGT”) on gains on disposals of residential property forward to 30 days after the date of disposal.
  • The change takes effect for disposals on or after 6 April 2020.
  • The computation of the gain will be a standalone report and payment.
  • Self-assessment taxpayers will continue to report the gain on their tax returns as well as making the initial report.

Disposals affected

Any direct disposal of UK land on which a residential property gain accrues and is made on or after 6 April 2020. This includes disposals of a main residence where the gain is not fully relieved.

Non-resident disposals have been subject to a reporting regime since CGT became chargeable on residential property disposals by non-residents in 2015.

Returns

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.

Returns may be amended, but only in respect of events that had already occurred at the date the return was delivered. The normal 12-month period is allowed for amending the return.

Enquiries into returns are covered by the normal enquiry rules, and if a self-assessment return is subject to an enquiry, then any returns made under this legislation in relation to gains shown on that return are also deemed to be under enquiry.

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 amount paid is referred to as a payment on account of the CGT for the year.

Calculating the tax

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.

Example

Peter sold his buy to let property in June 2020 realising a gain of £40,000. Peter expects to be a higher rate taxpayer in 2020/21. The tax calculated on the gain is £7,840 (this assumes that the annual exempt amount in 2020/21 remains £12,000). This tax was paid as required within 30 days of completion of the sale.

Peter sold some shares in August 2020, incurring a capital loss of £30,000. As a result, Peter has no CGT liability for the 2020/21 tax year but will be unable to claim the refund of £7,840 until he submits his self-assessment return after 5 April 2021. This is because an amendment of his property disposal return is not possible as the loss was not a condition existing at the time of the property disposal.

Practical issues

It is safe to assume that most clients with buy to let property will be liable for tax on disposals. It will therefore be very important for clients to advise their usual contact at Garratts in the early stages of any planned sales to allow time to gather the relevant information and to calculate the potential tax payable, so that funds can be reserved from the proceeds of sale to pay the tax due.

Given the short timescales, clients may wish to review and update their records of costs and enhancement expenditure and make sure that Garratts have all the details so that the files are sufficiently up to date to allow a quick reaction if a decision is made to market a property.

Conclusion

The Treasury’s desire to collect tax more quickly is understandable. However, this is a difficult change to manage in practice. One must hope that HMRC is willing to apply a light touch to penalty provisions in the early years while conveyancers, advisers and taxpayers familiarise themselves with the rules.

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