New legislation brought into effect from 6 April 2020 has seen an acceleration in the reporting and tax payment requirements relating to UK residential property sold by UK resident owners. Similar rules have applied to non-UK residents since April 2015, and those rules have now been extended to include UK residents as well. Given that the market for rural properties is currently strong, those looking to realise capital profits by selling residential property could easily be caught out by the new requirements.
The rule applies when a UK residential property is sold and a capital gains tax (CGT) liability arises. In these circumstances, the sale needs to be reported, and any associated CGT paid, within 30 days of the date of completion.
This is a significant change to the old rules. Previously, taxpayers were required to report such disposals, and pay any resultant CGT, as part of the usual self-assessment tax return process; with a filing and tax payment deadline of 31 January following the end of the relevant tax year.
HMRC acceded a ‘soft-landing’ period of three months in respect of the changes, ending on 30 June 2020, during which no late filing penalties would be applied, although late payment interest would still be charged. Late reporting of properties sold after 1 July 2020 are expected to be subject to the usual statutory late filing penalties, which start at £100, and with tax-geared penalties being applied from the six-month filing deadline.
Where the rules do not apply
The ‘transaction date’ on property transactions for CGT purposes is usually the date of exchange; therefore, property sales exchanged before 6 April 2020, but completed after, will not be caught by these new rules.
HMRC has also confirmed that, where no liability to CGT arises they do not expect a return to be filed – this is typically because the sale gives rise to a loss, or the property has been the taxpayer’s only or main residence throughout their ownership period. This differs from the requirements for non-UK resident taxpayers, however, who are still required to report their residential property transactions, even if no tax is due.
In addition, those that meet one or more of the following criteria will also be exempt from having to prepare and file a return:
- The sale or disposal was to a spouse or civil partner;
- The gains (including any other chargeable residential property gains in the same tax year) are within the tax-free CGT annual exemption (£12,300 for 2020-21); or
- The property is located outside the UK.
It is also worth noting that a taxpayer may choose to submit a CGT return reporting a loss, as it may be in their interest to do so. This is likely to be the case where there is an expectation that a subsequent sale of residential property will take place later in the same tax year that is likely to give rise to a gain.
Filing mechanics and potential pitfalls
The change in reporting timeframe means that the information required to calculate the capital gain or loss position, for example historic base cost information and records of any capital improvement expenditure, need to be pulled together much more quickly than in the past. Where this is not possible, estimates can be used and a ‘payment on account’ of the tax can be paid. However, any underpaid tax will attract interest (and potentially penalties).
The new CGT returns are submitted using the existing Government Gateway facility, but the taxpayer is required to establish a specific CGT account for these purposes. This can only be done by the individual who is liable to pay the tax; although an agent can be appointed once the CGT account has been set up.
When setting up a Government Gateway account it is important to ensure that the correct type is used. Different Government Gateway accounts exist for individuals, as opposed to trustees, company directors or executors acting on behalf of a deceased estate. This is important, as the accounts require different reporting information, and it is not possible to set up an ‘individual’ CGT account using an ‘organisation’ Government Gateway login.
In order to create an online CGT account to report a disposal, taxpayers are advised that they will require the following information:
- Property address and postcode;
- Date of acquisition of the property;
- Date of exchanging contracts for disposal of the property;
- Completion date of the transaction;
- Purchase price of the property when acquired, or base cost;
- Price of the property when sold/disposed;
- Costs of buying, selling or making improvements to the property; and
- Details of any tax reliefs, allowances or exemptions to which entitled.
Given the level of detail required, and the short timeframe in which to finalise the reporting, it is advisable to begin gathering historic information as early as possible in the disposal process. This will help avoid incurring late filing and payment penalties, and prevent any late payment interest from being applied.
Please do get in touch with your usual Saffery contact for further details of these changes and how they might affect you.
For further advice on any issues raised here, please contact your usual Saffery partner.
David Chismon, Director