Selling Residential Property – Just 30 Days To Pay Capital Gains Tax?

Lee Sharpe looks at the harsh new capital gains tax regime that the government intends to impose from April 2020. 

 

The proposal to drastically shorten the interval between making a capital disposal on dwellings and settling any capital gains tax (CGT) due has been around since the Autumn 2015 statement. If the then-Chancellor had had his way, the measure would be taking effect from April 2019. It has instead been delayed until April 2020.  

 

However, the basic mechanism will apply as originally envisaged; UK investors who dispose of residential property will be obliged to make a payment on account towards any CGT due, within 30 days of the disposal of the property. It is yet another thinly-veiled tax grab (at least in terms of cash flow) on buy-to-let (BTL) landlords, with little evidence to support the claim that it will reduce the risk of non-payment of CGT, so as to warrant the additional burden on taxpayers. 

 

This requirement should be looked at first from the perspective of the current regime – self-assessment.  

 

By way of illustration, CGT due on a disposal at any time in the current tax year (2018/19) – ending 5 April 2019 – will not be due until 31 January 2020. This means that a disposal made as early as 6 April 2018 need not be paid until almost 22 months later.  

 

This may seem exceptionally generous, but in CGT terms there has always been a relatively long lead time between gain and payment, for several key reasons: 

Note that reporting under self-assessment will still be necessary, just as now; the new regime simply imposes an additional requirement to pay the CGT sooner than under self-assessment – and by implication, to work out how much CGT is actually due beforehand. 

 

Something akin to this regime has actually been around for several years already; the non-resident CGT (NRCGT) regime imposed a CGT charge on non-residents disposing of UK property, broadly to the extent that the gain is deemed to have arisen since April 2015.  

 

Since that charge was introduced, non-residents who disposed of residential property in the UK have had to declare the disposal within 30 days and pay any CGT calculated to arise, unless they already file under self-assessment, in which case payment can be deferred until the normal due date under self-assessment. A taxpayer’s already being in self-assessment does not, however, relieve them of having to file an NRCGT return.  

 

One of the most notable issues arising from the introduction of the NRCGT regime is how many penalties HMRC has managed to raise for failing to file an NRCGT return within the 30 day deadline – at times, more than a third of all NRCGT returns have been late. One of the key reasons for this is HMRC’s failure to adequately publicise the new regime. This could easily happen again when the regime is introduced for UK resident taxpayers.  

 

Note that while the NRCGT regime currently allows non-residents who are also self-assessment taxpayers to defer payment until the usual self-assessment deadline, this will be changed to align with UK resident taxpayers for disposals from 6 April 2020 – i.e. from that date a CGT payment on account will be required within 30 days of sale, even if the taxpayer is also within the self-assessment regime. 

 

Unlike CGT generally, the 30-day clock starts on completion of sale, rather than on exchange of contracts. 

 

When calculating any CGT to be paid on account, the taxpayer can utilise losses brought forward, including in-year losses. But if the taxpayer makes a capital loss later in the year, this may be ignored unless another CGT payment on account is required later on. It follows that it may be better in some cases to crystallise losses before gains. 

 

Basically, a gain is not reportable under the new regime unless there is CGT to pay. Exceptions could be because of losses and the annual exemption, excepted transfers (such as between spouses, etc.) or where principal private residence relief applies in full. 

 

CGT in the UK is calculated on the basis of gains and losses arising in a tax year; likewise, UK landlords are used to having to deal with their tax affairs mostly on an annual basis. This will have to change.  

 

Landlords and their advisers will need to get used to the new CGT reporting and payment requirement, and to estimating in-year income, gains and losses. A 30-day notice period gives precious little time to collate the historic records that will often be required to calculate the CGT that will be due. It may well be better for property investors to let their adviser know as soon as they decide to market a property, rather than to wait until it is sold and the countdown begins in earnest. Advisers may want to warn all clients who own residential property, so that they are prepared for the new regime.  

 

It will apply to non-UK properties as well, although there are exclusions for properties in territories subject to a double taxation agreement, or where the remittance basis applies to the taxpayer. 

 

Gifts may also be problematic; many landlords wrongly assume that there is no CGT on gifts because there are no proceeds. Gifts between spouses who are living together are normally exempt, but otherwise property gifts are rarely protected. An adviser may have plenty of time to address this misunderstanding before the tax return and payment are due under the current regime, but not from April 2020. 

 

In particular, the disposal of one’s only or main residence will not automatically be exempt from the new regime. While the main residence will often effectively be CGT-free, there may be times when the period or proportion of non-qualifying use means CGT is due – so a report and payment on account will soon be required.  

 

UK resident companies are not subject to the new regime. Yet another reason for BTL landlords to seriously consider incorporation!