Sarah Bradford examines proposals to require payment of capital gains tax where a taxable gain arises on the disposal of a residential property within 30 days of completion.
From April 2020, new rules are to be introduced which will require a payment on account (POA) of capital gains tax (CGT) to be made within 30 days of completion where a chargeable gain arises on the disposal of a residential property. The payment will be credited against the individual’s income tax and CGT liability for the year.
Because for most homes any gain arising on the sale is covered by the only or main residence exemption, the new payment window will, in the main, affect those disposing of a rental property or a second home.
Background
Earlier in the year, HMRC undertook a technical consultation, which considered:
- how the amount payable will be calculated;
- the administration of those payments; and
- changes to the existing CGT payment on account system for non-residents who dispose of UK residential property.
The consultation ran from 11 April 2018 to 6 June 2018. It is available on the Gov.uk website at www.gov.uk/government/consultations/capital-gains-tax-payment-window-for-residential-property-gains.
Under the current rules, CGT is payable via self-assessment by 31 January after the end of the tax year in which the gain arose. This gives a payment window of between 10 and 22 months from the date on which the sale is made.
The government announced their intention to reduce the payment window to 30 days in 2015. The new deadline was originally due to apply from April 2019; however, it was announced in 2017 that the start date would be deferred until April 2020.
Applying the rules: UK residents
From April 2020, a POA of CGT may need to be paid where a residential property is sold or otherwise disposed of (for example, if it is given away).
Where an amount is payable on account, it will need to be paid to HMRC within 30 days of the completion date. The taxpayer will need to complete a special POA return confirming the disposal and the amount payable, and this will need to be submitted to HMRC at the same time. No return will be required where a residential property is sold but no payment on account is required (for example, because the property is covered by the main residence exemption).
The existing definitions apply to determine whether an asset constitutes ‘residential property’, broadly encompassing:
- land (in the UK or abroad) which during the period of ownership has included a building which is suitable for use as a dwelling, or which is in the process of being built or converted for such use;
- a contract for purchasing a dwelling ‘off-plan’ from a developer; or
- an option binding a person to sell either of the above.
It should be noted that certain types of accommodation, such as care homes and student accommodation, are not classed as ‘dwellings’; as such, a POA will not be required should a gain arise on their disposal.
A POA will also need to be calculated where a UK resident disposes of an overseas residential property, unless it is expected that the gain on the disposal will also be taxed in another country and an amount of double tax relief will be available for offset against some or all of the UK CGT, or the gain will be taxable under the remittance basis.
Calculating the payment on account
Following the disposal of a residential property, it will be necessary to calculate whether a POA will need to be made. The calculation will follow the normal CGT calculation but will take into account events only up to the date of completion. As the POA relates only to residential gains:
- chargeable gain realised on assets other than residential property are ignored; but
- unused losses, whether in relation to residential property or other assets, are taken into account.
Further, available reliefs and the annual exempt amount are applied in the normal way.
This approach allows losses realised in the year to date and allowable losses brought forward to be set against the residential gain when working out the POA. The annual exempt amount is also set against the gain for the purposes of working out whether a POA is due. However, the calculation does not take account of any anticipated gains and losses later in the year.
The POA is worked out using residential capital gains rates of 18% and 28%, as appropriate.
Example: Sale of holiday home
In June 2020, Arthur realises a gain of £60,000 on the sale of his Dorset holiday home. Completion of the sale takes place on 17 June 2020. In May 2020, he sold a painting realising a gain of £1,500. He has brought forward unused losses of £8,000. He also plans to sell an antique table later in the year and expects to make a loss of £500.
Arthur is a higher rate taxpayer, paying CGT at a rate of 28%.
For illustration purposes only, it is assumed that the annual exempt amount for 2020/21 is £12,000.
The payment on account is calculated as follows:
£
Residential property gain 60,000
Less: losses b/f ( 8,000)
52,000
Less: annual exempt amount (12,000)
Gain on which POA based 40,000
POA @ 28% £11,200
No account is taken of the gain on the painting or the anticipated loss on the antique table when working out the POA.
Under the new rules, Arthur will be required to make a POA of the CGT due within 30 days of the completion date (i.e. by 17 July 2020).
Where a property has mixed use, a POA will only be required on the portion of any gain that relates to a residence. So, for example, if a shop with a flat above it is sold, a POA will only be required to the extent that the gain relates to the flat.
If the gain is exempt (e.g. the gain is covered by the main residence exemption or annual exempt amount) or there is a loss, there is no POA to make, and no return either.
It should be noted that the payment window runs from the date of completion, whereas the date of disposal for CGT purposes is normally the date on which contracts are exchanged. Consequently, these may potentially fall in different tax years.
Subsequent disposals
If there are subsequent residential property disposals in the same tax year, the approach for each disposal is to work out the POA for each residential disposal for the year to date, compare the POA due to that (if any) paid already, and pay the balance. If the POA on the later disposal is less than has already been paid (for example, if losses have been realised since the previous residential property disposal), the overpayment becomes repayable, together with repayment interest.
Returns
Where a POA is due, a return will also need to be made to HMRC.
End of year reconciliation
As the POA is only made in relation to residential gains, the overall CGT position must be calculated at the end of the year, and the CGT pages completed in the usual way. The POA will be set against the income tax and CGT liability for the year, with a repayment being made, if appropriate.
Non-residents
In 2015, the scope of UK CGT was extended to include disposals of UK residential property by non-residents. A POA system is also to be introduced for disposals of UK residential property by non-residents.
Final thoughts
Taxpayers realising gains on residential property will have to pay the associated tax over to HMRC somewhere between nine and 21 months earlier than at present. This will produce a cashflow windfall for HMRC – at the detriment to the taxpayer.
Practical Tip:
Consideration should be given to the order in which assets are disposed of. If an asset is likely to realise a loss, if possible this should be realised ahead of the residential gain, so that the loss can be taken into account in computing the POA.
