Tim Palmer looks at the considerable capital gains tax obligations placed on individual landlords when they make a capital gain from selling UK residential rented property.
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Individuals who rent out a house or flat and then sell it, making a capital gain, are now faced with a very complex and demanding capital gains tax (CGT) regime.
They have to file a ‘capital gains tax on UK property return’ and also pay the CGT due within 60 days of completing the sale of the property. Trustees and personal representatives also have to comply with this regime, but not companies. This applies to gains made on the sale of residential, not commercial, property.
Who, what and when?
If a taxpayer owns (for example) a sports shop with a rented flat above it, careful consideration needs to be given to the capital gain on disposal. It is only the gain on the rented flat which comes within the 60-day CGT regime. The relevant tax legislation is contained in FA 2019, Sch 2.
Taxpayers only have to file this ‘capital gains tax on UK property’ return within 60 days of completion if CGT is actually payable on the gain. If there is no CGT payable, the return does not need to be completed and filed. However, non-UK residents are required to complete and file this return, regardless of whether a chargeable gain arises.
This CGT ’60-day pay and file’ regime, in the main, affects UK individual landlords who sell and make gains during the tax year on the disposal of rented houses and flats. For example, if a landlord sells five UK rental properties in the fiscal year and makes a gain on each one, they will have to file five CGT returns, each within 60 days from the date of completion of the sale of the property. The landlord will also have to make the appropriate payments of CGT on the same dates.
This CGT regime also applies to the disposals of second homes and relevant domestic property capital gains, which are not fully covered by main residence relief and other CGT exemptions.
Example 1: Sale of former main residence
Ray acquired a house in Essex for £400,000 on 1 January 2017 and lived in it as his principle private residence. On 31 December 2019, Ray moved out of the property and went to live with his fiancée, Lucy. Ray rented out the property from 31 December 2019.
On 8 April 2023, he unconditionally exchanged to sell the property and completed the sale on 30 April 2023. He sold the property for £850,000. Ray is a higher-rate income taxpayer. The taxable gain he has made is as follows:
|
|
£ |
|
Proceeds |
850,000 |
|
Cost |
(400,000) |
|
Capital gain |
450,000 |
|
Less: MRR relief (see below) |
(270,000) |
|
Net gain |
180,000 |
|
Less lettings relief |
- |
|
|
180,000 |
|
Less CGT annual exemption |
(6,000) |
|
Taxable gain |
174,000 |
CGT payable:
£174,000 @ 28% = £48,720
This CGT of £48,720 is payable within 60 days of completion, i.e., by 29 June 2023.
Note
The main residence relief is calculated based on the capital gain of £450,000 pro-rated by the actual period of occupation (36 months) and the deemed occupation (9 months), i.e., a total 45 months against the total period of ownership (75 months): £450,00 x 45/75 = £270,000.
This CGT reporting regime is in addition to declaring the gain on the usual self-assessment tax return, not instead of it.
Don’t be late!
There are penalties for late filing, and interest is charged on late payment of the CGT. For example, if the CGT return was seven months late, a fixed penalty of £100 will be charged for the late return (under FA 2009, Sch 55, para 3). As the return was filed more than six months late, HMRC will charge a penalty of either 5% of the CGT due or £300, whichever is greater (under FA 2009, Sch 55, para 5).
However, it is possible for the landlord to appeal against the penalties charged. If a self-assessment tax return has been filed but the appropriate ‘capital gains tax on UK property’ return has been missed and not submitted, the property return must be filed on paper.
The capital gain is taxable in the fiscal year in which the landlord unconditionally exchanges to sell the property, despite the reporting being required within 60 days from completion. The submission of the self-assessment tax return does not displace the requirement to submit a ‘capital gains tax on UK property’ return. If this ‘property return’ is required to be submitted, it must normally be filed prior to the self-assessment tax return. Indeed, once the self-assessment tax return has been filed, HMRC’s systems will block access to the online CGT on UK property service.
However, there is one occasion when the self-assessment tax return alone will suffice and remove the requirement completely to submit a ‘capital gains tax on UK property’ return. If the landlord can manage to do this, it will also result in the CGT not needing to be paid until the normal 31st January payment deadline after the end of the fiscal year in which the gain was made.
To do this, the landlord must file their self-assessment tax return within 60 days from the date of completing the sale of the property. If so, it will displace the need to submit a property return.
Example 2: Reporting disposal on self-assessment return
Bobby sells his rental flat in an unconditional exchange on 23 March 2023. His gain will therefore be taxed in the fiscal year 2022/23. He completes the sale of the flat on 20 May 2023. So long as Bobby files his 2022/23 tax return by 19 July 2023 (within the 60-day window), a property return will not need to be submitted.
However, to do this, the CGT reported on the self-assessment tax return must be at least equal to or greater than what would have been reported on the property return.
The ‘capital gains tax on UK property’ return must be filed and the appropriate CGT paid for each disposal. If the residential property is owned jointly by a husband and wife (or civil partners) and subsequently sold for a capital gain, both spouses will have to file their own CGT returns and pay the CGT liability separately. Capital gains which arise on overseas properties are not part of this regime.
This new CGT regime could also apply to the sale of a residential property following a gift, a transfer in or out of a trust if a CGT holdover claim has not been made, or additionally as part of a divorce settlement.
Pitfalls and planning opportunities
Landlords must be careful with estimates included in the ‘CGT on UK property’ return. If the estimates have been found to be ‘unreasonably low’ when the actual figures are substituted, HMRC will charge interest from 60 days after completion until the full CGT is paid. The landlord must tick the ‘estimate’ box if, indeed, any estimates have been made. If the landlord does not tick it and additional CGT turns out to be payable, HMRC will charge interest, even if the estimate was not ‘unreasonably low’. It is also the landlord’s responsibility to eventually amend the estimated figures. HMRC will not send out reminders to revise the estimate.
There are considerable potential pitfalls and problems facing individual landlords when they make capital gains selling rented residential property. Prompt notification and reporting of the gain to HMRC is vital. However, there are planning opportunities available as well. It would be advisable for the landlord’s tax adviser to have all the original relevant property acquisition costs in place as well, in readiness for future disposals.
Practical point
Accountants and tax advisers should regularly liaise with their individual landlord clients to ensure that the client advises them as soon as they sell a rented residential property during the tax year. Considerable penalties could be charged if the landlord’s ‘capital gains tax on UK property’ return is filed late.
