Sarah Bradford outlines the new rules to apply from 6 April 2020 for reporting residential property gains and paying the associated capital gains tax.
From a capital gains tax (CGT) perspective, making a gain on a property that has always been the owner’s only or main residence is a ‘good thing’ as the gain can be enjoyed free of tax, even if the owner jumps off the property ladder following the sale.
However, when it comes to gains on residential property where full private residence relief is not available, the tax regime is increasingly punitive; not only does a higher rate of tax apply to residential property gains than other gains (with the exception of carried interest), from April 2020 the timescale for reporting such gains to HMRC and paying the associated tax is significantly reduced.
When may a residential property gain arise?
Private residence relief applies to shelter a property that has been the owner’s only or main residence throughout the period of ownership. The availability of the final period exemption and lettings relief may mean even where a property has not always been the only or main residence, any gain can still be enjoyed free of CGT.
However, where a property has never been the only or main residence, or where relief is not available in full, a chargeable gain will arise. If it is not offset by allowable losses or covered by the annual exempt amount, CGT will be payable.
Gains made on the sale of investment properties (e.g. buy-to-let investments and second homes such as holiday homes) may give rise to a residential property gain on which CGT is payable.
The announced curtailment of lettings relief and the reduction in the final period exemption will bring more property sales within the CGT net from 6 April 2020 onwards, increasing the number of taxpayers who will be affected by the new rules.
Higher tax rates for residential property gains
Not all gains are equal, and higher rates of CGT apply to residential property gains (and carried interest).
The rate at which CGT is payable depends on whether total income and gains exceed the basic rate limit (which was £37,500 for 2019/20). Up to this limit, residential gains are taxed at 18% (compared to 10% for other gains); thereafter, the tax rate is 28% (compared to 20% for other gains).
Reporting pre-6 April 2020 residential property gains
Chargeable residential property gains arising prior to 6 April 2020 are reported with other gains arising in the tax year to HMRC on the CGT pages of the self-assessment return. This must be filed by 31 January after the end of the tax year to which it relates.
Gains arising in the 2019/20 tax year, including any chargeable residential property gains, must normally be notified to HMRC by 31 January 2021.
One CGT bill
Prior to 6 April 2020, the total CGT liability for the year, reflecting all chargeable gains and allowable losses (including any brought forward losses), and allowing for the annual exempt amount, is worked out as part of the self-assessment for the year. Any CGT for the year must be paid by 31 January after the end of the tax year. It is not necessary to deal with any chargeable residential property gains separately; everything goes into the pot.
This gives a lag of between nearly nine and nearly 22 months between realising the gains and reporting it to HMRC and paying the tax, depending on when in the tax year the gain arose.
New rules from 6 April 2020
Where a residential property gain arises on a direct disposal of UK land or property by a UK resident on or after 6 April 2020, a new return must be completed and filed with HMRC within 30 days of the date of the disposal.
A return is only required where a gain is made; no return is needed if (for example) a second home or an investment property is sold at a loss. Likewise, a return is not required if the gain is entirely sheltered by private residence relief (including, where applicable, the final period exemption and lettings relief). Nor is a return required for disposals between spouses and civil partners on a no gain/no loss basis, disposals by a charity or of a pension scheme investment, or where the disposal in question is the grant of a lease at arm’s length for no premium.
Once made, the return can be amended within a 12-month window, but only in respect of events that had arisen at the time the disposal was made.
Requirement to make a payment on account
From 6 April 2020, a new CGT payment window applies in respect of UK residential property gains realised by a UK resident. Where such a gain is made on or after that date, a payment on account of the CGT due on that disposal must be paid within 30 days of the disposal – matching the deadline for filing the associated return.
This is considerably earlier than for pre-April 2020 gains, in respect of which the normal CGT deadline of 31 January after the end of the tax year applies. The change creates an anomaly such that CGT on residential gains arising in the period from 6 April 2020 to 31 December 2020 will be due before those arising in 2019/20.
Calculating the payment on account
In working out the CGT on post-6 April 2020 residential property gains, the annual exempt amount can be taken into account, as can any allowable losses brought forward or realised prior to the disposal.
However, losses arising after the disposal cannot be taken into account, even if these are realised in the 30-day window for filing the return and making the payment on account.
Finalising the position
In much the same way as payments on account for income tax purposes are taken into account in finalising the tax bill under self-assessment, payments made on account will be reflected in determining the overall liability for the tax year under the self-assessment position. The total CGT liability for the year will calculated (initially at least) through the self-assessment system reflecting all gains and losses in the year.
If the final bill is more than the payment made on account (e.g. because non-residential gains have also arisen in the tax year), the excess must be paid by 31 January after the end of the tax year. In the event that the final bill for the tax year is less (e.g. because losses have been realised after the residential property gain) a refund of the excess can be claimed once the self-assessment return has been filed.
Example: Sale of holiday home
Imogen completes on the sale of her holiday home on 10 April 2020, realising a gain of £75,000. She has made no other disposals at this point in the 2020/21 tax year. She is a higher rate taxpayer.
In working out the payment on account, Imogen can take her annual exempt amount for 2020/21 into account (at the time of writing, this had yet to be announced and is assumed for illustration purposes only to be £12,000). The chargeable gain is, therefore, £63,000 (i.e. £75,000 - £12,000) on which CGT of 28% (i.e. £17,640) must be paid by 10 May 2020. The associated return must be filed by the same date.
In August 2020, Imogen sells some shares, realising a loss of £4,600. She makes no other disposals in 2020/21.
For 2020/21, she realises net gains of £70,400 (£75,000 - £4,600), leaving her with chargeable gains of £58,400 after deducting her annual exempt amount of £12,000, on which the overall CGT liability is £16,352. However, Imogen has already made a payment on account of £17,640 and is, therefore, due a refund of £1,288.
Practical tip
Where a sale generating a residential property gain is on the cards, completing prior to 6 April 2020 rather than afterwards would give the taxpayer until 31 January 2021 rather than 30 days in which to pay the associated CGT.
