Taking effect from 06 April 2020, residential property will now be subject to a new capital gains tax and payment regime. The new rules dictate that if the disposal of a UK residential property has resulted in a gain, there is a requirement for the individual/body to report the disposal to HMRC and pay any capital gains tax due within 30 days of completion.
This differs from any ordinary gains realised on other types of property, which continue to be reported under the self-assessment reporting rules. Relevant residential property subject to the new regime is limited to UK residential property sold either by a UK resident or a non-UK resident.
The new are comparable to those that were introduced 6 April 2015 and refined from 6 April 2019 for non-UK residents selling their UK residential properties – now the rules have been adjusted again to capture UK residents. This includes individuals, trustees, personal representatives, partners of partnerships, and joint owners of property.
It should be noted that UK residents will not fall within this regime if any of the following points apply:
- A legally binding contract for the disposal was made before 06 April 2020.
- The individual qualifies for full Principle Private Residence (PPR) relief.
- The disposal was made to a spouse or civil partner.
- The gain realised (including any other chargeable residential property gains in the same tax year) falls within the individual’s annual exemption. For the 2020/21 tax year the annual exemption is £12,300; or
- The property was sold for a loss.
In contrast Non-UK residents are still required to report disposals of UK property or land regardless of whether there is a capital gains tax liability within 30 days of completion.
Therefore, the new regime is likely to affect all individuals who are selling a UK residential property in any cases where it has not been used as a main residence and will not qualify for full PPR relief. Landlords who sell their rental properties will also fall within this new regime along with individuals who dispose of an inherited a property which they have never used as their main home. In all cases, it will be necessary to work out if you have a gain imminently following the sale.
HMRC plan to launch a new online service to allow affected taxpayers to report and pay any capital gains tax owed. This online service plans to be fully complete and up and running by the end of April 2020. Whether it will even be possible for a taxpayer to register for their online account in 30 days remains to be seen!
The details that need to be included within the return are much the same as what would be reported on a self-assessment return such, as length of ownership, amount of PPR relief claimed, acquisition cost, capital costs of improvements, incidental costs of acquisition and disposal and finally the disposal proceeds. Separate returns will need to be filed where more than one property has been sold unless they have been sold on the same day. Separate returns will also need to be filed for each owner of the property, even if the joint owner was your spouse.
When calculating the amount of capital tax due, we use the same rules of computing the gains under self-assessment for residential property. For example, we would allocate any brought forward losses and our annual exemption against the gain, to leave us with the taxable gain which would then be subject to the residential capital gains tax rates of 18% and 28% (depending on what rate taxpayer you are). You may be able to see an issue forming where the taxpayer will have to determine whether they are a basic or higher rate taxpayer for a tax year which has yet to end. Taxpayers will therefore be required to estimate their income for the relevant tax year in order to determine which band the gain falls into. As these figures are estimates, HMRC have said that they will allow up to the self-assessment filing deadline for the individual to amend the capital gains tax return to correct the amount of taxable income on the capital gains tax return. Any refunds of capital gains tax will be obtainable through the individual’s self-assessment tax return after the tax year has finished.
The late filing penalties that will apply for these new capital gains tax returns are substantially the same as that for one’s self-assessment tax return however the only difference is that HMRC will not impose a £10 per day penalty when the return is the 3 months ate for a maximum of 90 days.
In conclusion, the substantial acceleration in the payment of one’s capital gains tax liability and submission of an additional return will present issues for all individuals who had hoped to wait until the self-assessment filing deadline to pay the capital gains tax liability. We recommend informing your advisors ahead of any sale of UK residential property so that returns can be filed timely and liabilities can be calculated promptly, given the significantly narrow timeline!
COVID-19 and transitional relief: HMRC is allowing a period of time to adjust to the new rules, and will not issue late filing penalties for CGT 30 day returns received late up to and including 31 July 2020. For UK residents, this means transactions completed between 6 April and 30 June 2020 and reported up to 31 July 2020. Transactions completed from 1 July 2020 onwards will receive a late filing penalty if they are not reported within 30 calendar days. Interest will accrue if the tax remains unpaid after 30 days.
Ingleton Partners is a UK and US tax specialist and can assist with any enquiries on these matters.