NOW LIVE: Changes to Capital Gains Tax on sale of Private Property
From 6 April 2020, residential property sellers must complete a standalone (“CGT”) tax return and pay any capital gains tax (CGT) due within 30 days of the property sale.
The exceptions are sales of main residences but even these could fall foul if not carefully managed (see below).
HMRC has set-up a new system for the administration and tax collection for this seismic change to CGT rules have confirmed that they will not assert any penalties for late filing of the CGT return or payment of CGT for sales of properties up to 31 July 2020.
This gives sellers some much needed breathing space when cash flow may be restricted due to COVID-19 and also allows more time for those sellers who were looking to sell properties before the deadline but were unable to, due to COVID-19.
What has changed?
The buy-to-let market saw a sharp drop in of sales in the first 3 months of 2020, down from 15% sole in the final quarter of 2019. This reflects the lowest market share for buy-to-let landlords in a decade.
Whether this is COVID19 or tax related, the UK government will be pleased to see more properties coming on to the market for first time buyers and second home purchasers, but could be disastrous for renters, who already pay high rental in some of the biggest cities in the UK.
Earlier payment of Capital Gains Tax (CGT)
This idea of bringing forward capital gains tax payments related to property sales was initially the brainchild of George Osborne, but did not take off at the time.
What has now come into effect as at 6th April 2020 is the required for UK residents of residential property (not their main home) to pay their CGT liability within 30 days of the property sale.
Up to this point, declaration of CGT liability was done via the self assessment tax return, but now a standalone return should be completed and payment made, both within the 30 day deadline.
Completion of a CGT Return
A standalone tax return is to be completed within 30 days of the date of sale, using the completion date rather than the exchange date of contract as the trigger date. This is despite the fact that the exchange of contracts is considered the date of sale for CGT purposes usually.
You do not need to complete a tax return if there a gain has not been made, called a ‘no gain/no loss’ in tax terns, and also when there is no capital gains tax due at all for a residential property sale.
How to calculate the capital gains tax due
You are able to offset any capital losses you may have in the tax year in question.
Where there is more than one disposal in a year, the CGT 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.
As noted above, these CGT payments are known as payment on accounts so should be considered as an interim payment of CGT and the final calculation of the total CGT liability will be completed as usual through the self assessment tax return.
How to pay the capital gains tax due
The capital gains tax due is calculated not taking into consideration any other CGT non residential property disposals made.
The CGT is due on the date that the tax return is due, that is, 30 days from completion date.
The payment made here is known as the payment on account of the capital gains tax due for the tax year in question.
Working Example of the change in CGT rules
John sold his buy-to-let property in May 2020, and realised a gain of £30,000.
John is a higher rate tax payer in the same tax year, i.e. 2020/2021.
If John uses his annual exemption of £12,000, the remaining £18,000 gain will be taxed at 28% and John’s CGT liability is £5,040.
John is due to pay his CGT liability and complete a tax return within 30 days of the property sale completion date.
In September 2020, John sold some shares, but incurred a loss of £30,000. As John’s loss outweighs the capital gain, he can offset the loss against the gain and receive a refund on the CGT he has already paid.
Therefore, when John comes to complete his Self Assessment Tax Return for 2020/2021, the earliest date he can complete is 6th April 2021, John will have no CGT to pay and will receive a refund of £7,840.
John will not be able to receive the refund earlier, in other words on the sale of the shares when he incurs a loss, nor can he amend the CGT return with the loss he has experienced, as the loss happened after the sale of the property.
Practical issues
Most property companies, letting agents and property sales agents, will be unaware of these change in CGT rules and many sellers may face penalties for late filing for CGT returns and penalties for late payment of CGT.
This has been bourne out for example in our experience when the non-resident CGT scheme came into force, and conveyancers were not geared up to deal with the tax change.
It is safe to assume now that all buy-to-let property owners will be liable for CGT at the point of sale of their properties.
It is therefore vitally important for landlords to speak to a tax specialist, such as Mirandus Accountants, well ahead of planned property sale dates to prepare for the tax liability and completion of the standalone tax return.
Be careful main residence property owners
There is an added complication when considering the 1.2 million main residence property owners currently in the UK who would usually enjoy capital gains tax relief via the Private Property Residence Relief, but who may become liable for CGT if they have had an extended leave of absence from their main residence working abroad or elsewhere in the UK, or due to divorce, separation from a partner or for any other reason.
Relying on estate agents or conveyancers for tax advice in these cases is very dangerous and a taxpayer may fall foul without realising, by relying on them to advise them correctly.
Conclusion
It is understandable for the Treasury’s need to collect CGT earlier and around the time of sale rather than waiting for completion of the self assessment tax return in January each year.
The delay in penalties for completion of the CGT tax return and payment of CGT from 6th April 2020 to 31 July 2020 is nonetheless very welcome.
