The Association of Taxation Technicians (ATT) is warning owners of second homes and buy-to-let landlords that for property sales from April 2020 they will have a much shorter period to pay any Capital Gains Tax (CGT) which arises.
People selling their only or main home should not be affected by the new rules provided that they are entitled to full private residence relief1 which exempts them from having to pay CGT on the sale.
Where CGT is due, a disposal (the technical term for a property sale or transfer – the rules will also catch those gifting property) is normally reported to HMRC in a self-assessment tax return. Under self-assessment, any CGT must be paid by 31 January following the tax year of disposal.2 The Government has noted that (depending on the timing of the sale within a tax year) this allows residential property owners between 10 and 22 months after the sale of the property before the tax is due. Concerned about the length of time before any CGT is paid, HMRC is planning to bring in new rules from April 2020 which will require individuals and trustees disposing of a residential property to make a payment on account of the CGT within 30 days of the completion of the sale.3 Sellers will have to calculate, report and pay the CGT that they believe is due within that window.
Jon Stride, Co-chair of ATT’s Technical Steering Group, said:
“This is another measure which will make life trickier for buy-to-let landlords, and second home owners.
“The new rules will significantly reduce the amount of time that those selling residential property will have to calculate and pay their CGT bill. CGT computations can be complex and it can take time to establish all the necessary facts to make an accurate computation of the taxable gain. Sellers will need to start gathering information and details of historic costs, or dates of occupation well in advance of the sale.”
Such ‘in year’ reporting can create complications as many individuals will not know what rate of tax will apply at the time of disposal. This is because the applicable tax rate4 for CGT depends on the individual’s total income for the tax year which can only be estimated at the time of disposal. Equally, individuals may make other disposals in the year liable to CGT which might affect the position. After making an ‘in year’ report, individuals will therefore need to review and revise the computation at the end of the tax year, either as part of their usual self-assessment procedures or via new ‘end of year’ reconciliation process. This will increase the compliance burden for taxpayers.
A particular area of concern is the treatment of capital losses, says the ATT. Under the current proposals, the taxpayer will only be able to take into account of losses which are known about at the time of disposal. If they incur more capital losses later in the same tax year, then it is likely that the original payment on account of CGT will be found to be too large. However, they will not be able to reclaim any overpayment until after the tax year has finished. This could leave the taxpayer out of pocket for some months, warns the ATT. The only time that capital losses realised after the disposal of the property can be taken into account is if the taxpayer disposes of further residential property in the same tax year.
When similar ‘in-year’ reporting rules were introduced for non-residents disposing of UK residential property, many individuals only realised they should have reported their disposals earlier when they came to complete their self-assessment return after the end of the tax year. In ATT’s response to a HMRC consultation on how to administer the change5 it has expressed concerns that UK individuals may also miss the earlier deadline and have asked HMRC to consider a ‘soft-landing’ for penalties in the early years of these new rules.
Jon Stride continued:
“HMRC say that they are introducing this rule as CGT payments are ‘out of step’ with the regular deductions made from those with salaries assessable until PAYE. However, many sources of income and gains which are dealt with under self-assessment could be said to be ‘out of step with PAYE’ on the basis that self-assessment allows the final bill to be calculated after the end of the tax year when all the facts are known.
“If the Government wants to accelerate tax payments in order to minimise possible loss to the Exchequer, we would like to see a wider debate on the timing of payment of tax rather than payments on account being introduced in a piecemeal fashion over a number of different assets or income sources. A broader debate would enable HMRC to identify clearly the specific areas of concern and the risks to tax collection and thereby enable identification of possible solutions.”
Notes for editors
- Private residence relief (PRR) entirely exempts any gain on disposal of a residential property from CGT provided that the property has been the only or main residence of the owner(s) throughout the period of ownership. Where the property has been occupied as the only or main residence for only part of that time, it is possible that only a portion of the gain will be exempt and there may be some CGT to pay. In this case the owner(s) should also consider if any of the various ‘deeming rules’ apply, which can allow the owner to deem the property to be their residence even if they were living elsewhere, for example if they were required to work overseas. There may also be the potential for letting relief in some cases if the property has been let out for part of the period of ownership and used as the owner’s only or main residence for other parts of that period.
- For a disposal made in the current 2018/19 tax year – i.e. 6 April 2018 to 5 April 2019 – an individual or trust self-assessment tax return is due by 31 January 2020. While the individual or trust may make payments on account for income tax due in 2018/19 during the year, any CGT for that period is not due until the 31 January 2020.
- If an owner exchanged contacts for the sale of a house on 15 April 2019 and the sale completed on 15 May 2019, the existing rules would apply and mean that any CGT arising would be due on 31 January 2021. By contrast, under the proposed rules, an exchange of contracts on 15 April 2020 with completion on 15 May 2020 would mean that the CGT had to be paid by 14 June 2020 – over seven months earlier than if the property had been sold in the previous tax year and indeed before any CGT was due for the previous tax year.
- CGT is generally charged at a rate of 18 per cent or 28 per cent on the taxable gain for residential property. The rate depends on the income tax rate of the tax payer. A higher rate taxpayer will pay 28 per cent on the gain while a basic rate taxpayer will pay 18 per cent on as much of the gain that fits within their unused basic rate band, and 28 per cent thereafter. For Scottish taxpayers the higher rate position is determined by UK-wide income tax rates.
- The ATT’s submission to HMRC and the original consultation can be found here.