The start of the new tax year on 6 April 2020 sees dramatic changes to the current capital gains tax calculation, reporting and payment regimes and it is imperative that owners of residential properties fully understand the consequences of those changes.
Who do the changes apply to?
The changes apply to any taxable person selling or transferring a property that results in a taxable gain. This means that for the vast majority of sellers/transferors of their own residential property, there is no impact because the sale of your only or main residence is covered by Principal Private Residence (PPR) relief and there is no capital gains tax liability. The changes are therefore relevant for those with multiple properties or those selling properties that they do not reside in at the time of sale.
What are the changes?
There are three key changes:
- earlier reporting and payment of CGT on residential property disposals
- reduction of the final period of ownership for Principal Private Residence Relief (PPR)
- the effective abolition of Letting Relief for residential landlords.
Here, we look at the first and arguably most significant of those changes, the acceleration of the reporting and payment of CGT on residential property disposals.
What is the current position?
Until 5 April 2020, a CGT liability arising on the sale of a residential property will need to be reported on the taxpayer’s Self Assessment Tax Return that will be filed no later than 31 January 2021. The taxpayer will have almost 10 months until 31 January 2021 to calculate and pay the CGT and because the tax year in review will have already completed, the taxpayer will have all the information required to enable the necessary computations to be prepared.
What will happen from 6 April 2020?
Any taxpayer selling or otherwise transferring or making a deemed disposal (such as a gift) of a residential property on or after 6 April 2020 will have just 30 days to both report and pay the CGT liability arising on the sale of that property. The completion date is used for the purposes of starting the 30-day countdown, even though the date of exchange is the relevant date for the purpose of calculating any CGT due, however, no return will be required where a legally binding contract for the sale is in place before 6 April 2020.
Note that the 30-day deadline applies only to residential property sales generating a CGT liability for the taxpayer. Where there is no such liability, for example, because the sale is fully covered by PPR, no return is required to be made.
What are the consequences of the accelerated reporting and payment periods?
For those with relatively simple tax affairs, the only consequences might be the administrative burden of preparing CGT calculations in a fairly time-pressured window of 30 days from completion and of course the much earlier handover of the cash to meet the CGT liability at the same time.
However, for those with more complex tax affairs, it is highly likely that the initial report made to HMRC to meet the 30-day deadline will involve the submission of a provisional CGT computation and payment of the CGT provisionally calculated and the true liability for the year will not be finalised until the taxpayer’s Self Assessment return for that year is filed (at which point any under or overpayment of CGT will be dealt with).
Factors affecting the taxpayer’s ultimate CGT liability may be numerous and complex and it is not the intention of this note to detail them, however, key influencing factors will include but are not limited to the availability of PPR (including the impact of the other changes noted above regarding the final period of ownership and availability of Letting Relief), the number of disposals of capital assets during the tax year, the availability of the taxpayer’s annual exemption and the tax status of the taxpayer (basic/higher/additional rate).
It is therefore imperative that taxpayers take appropriate tax advice from an accountant or tax adviser and that the timing of imminent residential property sales is carefully considered with to ensure there are no nasty surprises. For those unable to complete their sale before the new rules come into effect, it will be prudent to ensure that documentation relating to the calculation of a potential CGT liability is gathered promptly to ensure they or their advisers are able to prepare the provisional computation and return in accordance with the new deadline.
For more information, refer to https://www.gov.uk/government/news/get-ready-for-changes-to-capital-gains-tax-payment-for-uk-property-sales
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Please note that this article does not constitute legal or taxation advice. You should always speak to a legal or taxation professional to discuss your circumstances and consider your options.