Matthew Biles Partner, Head of Department, Private Wealth
From 6 April 2020 any capital gains tax due on a sale of a residential property must be paid within 30 days
From yesterday (6 April 2020) UK resident individuals, executors and trustees who sell a residential property in the UK will have 30 days to report and pay to the UK tax authorities, HMRC, any Capital Gains Tax (CGT) owed following completion of the sale. If the 30 day deadline is missed, HMRC may levy a penalty as well as charging interest on any late payment.
UPDATE: HMRC have issued guidance stating that there will be a 3 month period where the new CGT reporting and payment processes will be applied lightly. CGT should still be reported within the 30 day period, as discussed below, but HMRC have stated that penalties will not be levied on returns until 1 August 2020. This means that for transactions completed before 1 July 2020, people will have slightly longer to become accustomed to this new process and to report and pay any CGT due. For transactions completed from, and including, 1 July 2020 any CGT arising must be reported and paid within the 30 day window to avoid penalties or interest on late payments.
Furthermore, HMRC and the UK Government have stated that during the current COVID-19 pandemic, whilst every effort should be taken to pay such tax as it arises, they do appreciate that some people will find themselves in circumstances where this may not be possible. HMRC have stated that they will take a flexible approach to such cases, reviewing each case on its own merits. The two examples HMRC has provided of such a situation are if people “have gifted the property or need to find money to invest in their business in response to the Covid-19 crisis”.
Whilst the above considerations do provide some relief in the short term, and HMRC state that they will continue to review the effect of the COVID-19 pandemic on taxpayer’s inability to pay any CGT arising, it may be that this relief is only granted in exceptional circumstances and, of course, retrospectively after the tax has become due.
The basics – CGT arising from residential property sales in the UK
CGT is chargeable, with various exceptions, on a gain in value/profit realised at the time of a disposal of an asset over a certain value. In essence, if you transfer, including by way of gift, something tangible with a value of over £6,000 (in this case UK residential property) for a profit you may need to pay CGT.
In relation to residential property, CGT will often not need to be paid on any gain/profit made when selling your main home as Private Residence Relief (PRR) may be utilised. This is a relief that applies when a taxpayer disposes of their main residence and automatically exempts any connected capital gain. CGT will also not be payable when the transfer is to a spouse or civil partner or the gain is within an individual’s annual exempt amount (currently £12,000).
Impact on UK residents
From 6 April 2020, following new rules introduced by the Finance Act 2019, any CGT payable on such a sale by UK resident individuals, executors and trustees will need to be reported and paid within 30 days of completion of the sale. The new rules include gains on holiday homes, homes which are rented out and a property which has been inherited which is not your main home.
Reporting and paying any relevant CGT within the 30 days will be done via a UK Government self-reporting portal. Taxpayers can file this information directly or via their tax agent. It should be noted that self-assessment taxpayers will continue to also report the gain in their annual tax returns.
HMRC have advised that they have yet to be briefed on the specific penalties that may be levied on any late submissions. The current penalty for a late filing of a self-assessment tax return is an immediate £100 with rising penalties thereafter as time passes. Alongside any penalties, HMRC will impose interest on late payments of 2.75% APR.
The new rules apply only to taxable gains arising on or after 6 April 2020. This means that if unconditional contracts have been exchanged before 6 April 2020 but due to complete on or after 6 April 2020, any gain should be reported in the tax return for the 2019/20 tax year, as per previous years.
Impact on non-UK residents
Relatively little will change for those who are non-UK resident. They are currently required to report any sale, or a disposal of an interest, in UK property or land, whether CGT is payable or not, within a 30 day window following completion of the disposal. Any CGT which is payable, must now be paid within the 30 day window following completion. It is no longer possible to defer payment until submission of your self-assessment tax return. However, from 6 April 2020 non-UK residents will now be able to submit the one-off report and payment online.
We feel that a 30 day window for reporting and paying any CGT which may be due will, in certain circumstances, be a very tight deadline for taxpayers to meet. Often such CGT calculations are complex and span a number of years, if not decades. For instance if a property which was a main residence is then replaced with another residence but retained and let to tenants, the calculation could be very time consuming and require details of improvement works going back many years. With this in mind, a computation should be commenced as soon as there is sufficient information to ascertain if a gain will be made; a period most likely pre-dating completion.
Furthermore, calculation of a taxpayer’s net annual CGT position had traditionally been undertaken in their self-assessment tax return. This Return is drafted after the end of the relevant tax year allowing other asset disposals (that may give rise to capital losses and thus reduce the CGT due on the respective property sale) to be taken into account. HMRC will now require all CGT due on a residential property sale to be paid upfront and then for the taxpayer to apply for any refund, most likely months after the tax payment, from them once their Return is submitted.
It also seems that HMRC are not considering relaxing the introduction of this new reporting regime in light of the COVID-19 outbreak. However, the current lock-down which the UK is experiencing may well be taken into account by HMRC during any appeal against late penalties they have levied.
The new changes will mean that a more detailed tax review will need to be undertaken by a home owner considering disposing of UK residential property. If the property has always been their main residence then there should be no greater complications. However if this is not the case, then they will likely be impacted by these new rules to some degree. If CGT is payable, the detailed computation must be undertaken with urgency to ensure reporting and payment is completed within the 30 day window.
We at Gordon Dadds have detailed experience of undertaking such CGT calculations and filing tax reports with HMRC. If we can be of assistance please do contact either, Matthew Biles, Partner (MatthewBiles@incegd.com) or Roger Harding, Tax Director (RogerHarding@inceged.com) who are both members of our Private Wealth Team.