Lee Sharpe looks at the new requirement to notify and pay in advance of the traditional tax return schedule.
This article covers aspects of the relatively new regime that requires the owner of UK land to make prompt returns and payment on account of their capital gains tax (CGT) liability, and highlights a quirk of the rules that favours disposals late in the tax year. It focuses primarily on UK tax-residents.
The taxpayer is required to notify HMRC and to make a payment on account of their anticipated CGT rather quickly. Advisers will be all too aware of the difficulty in piecing together a CGT history for a property that may have been owned and enhanced over several decades. But HMRC has never been too concerned about causing problems for anyone – least of all landlords or agents.
The basics
The new regime was introduced for disposals on or after 6 April 2020 (under FA 2019, Sch 2). It requires UK tax residents subject to CGT to:
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notify HMRC of any disposal of UK residential property within 60 days of the completion of the disposal, where there is a CGT liability; and
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to make a payment on account of the CGT calculated to be due on the filing date of the notifying return.
(NB For disposals prior to 27 October 2021, the turnaround time was a mere 30 days).
Having initially tried to force everyone to report their disposals online, HMRC has finally seen sense and has published a blank property disposal return – at least on a trial basis.
Disposal and completion
The disposal of land can be a protracted affair. For CGT purposes, more generally, the key date is when the contract is ‘made’ (TCGA 1992, s 28). For UK land and property, this is normally the date on which contracts are exchanged; although, if there are conditions attached, it will be when they are satisfied.
While it may take weeks or months before the contracts are completed and ownership is actually transferred, the disposal date for CGT purposes will then be deemed to have taken place on prior exchange, etc. This is something to be particularly wary of when, for example, a solicitor issues a completion statement dated 10 April.
For this regime, the legislation states that the 60-day clock does not start to tick until ‘completion of the disposal’. Not all land transfers have a distinct ‘completion date’ in the everyday sense, but that does not mean the disposal has not been effected (or completed).
Beware gifts
Many taxpayers assume that a gift will trigger no CGT because there are no proceeds. This is not correct. Only gifts that enjoy special privilege – such as between spouses and civil partners living as a couple – are free of CGT.
Outside of such scenarios, the law broadly states that market value should be used instead of sale proceeds for transfers between connected parties or whenever there is an element of partial or outright gift (as distinct from a discounted sale at arm’s length, where the vendor is simply trying to get shut of an asset). Generally, a gift – once legally effective – will start the 60-day clock for full market value.
‘Residential property’ is a broader term than one might think
I recall an accountant who suggested demolishing the original dwelling immediately prior to sale, in the hope of avoiding the new regime (there were plans to develop the particular plot for new dwellings, so this was more a matter of timing). Alas, I had to point out that the regime catches residential property gains comprising a disposal of land that has held a dwelling at any time in one’s period of ownership because the legislation’s interpretations paragraph hooks in TCGA 1992, Sch 1B.
Worse, that definition of ‘residential property gain’ can also catch off-plan or similar arrangements that include a contract to build a dwelling in future on previously bare land or to adapt land for use as a dwelling. Even worse, said accountant has not spoken to me since. I didn’t make these rules!
Self-assessment still rules
HMRC was keen to promote this new regime as helping people stay out of self-assessment if they had no other underlying need to file tax returns.
However, most landlords will be in self-assessment already because of their rental income, so they will still need to file self-assessment returns and include these disposals (again) in the capital gains pages of their annual return.
Some good news?
UK-resident taxpayers have to engage with this regime only if they actually have a CGT liability. So there is no need to make a return unless a payment of CGT is also required.
I emphasise ‘CGT’ because companies do not pay CGT; strictly, they pay corporation tax on their capital gains. Note that UK-resident companies are not generally caught by this regime.
Even more good news?
The new return and payment are not required where the taxpayer files the corresponding self-assessment tax return that reflects the relevant disposal before the new property disposal return falls due.
This will be relatively unusual, but not impossible, where the disposal takes place towards the end of a tax year (FA 2019, Sch 2, para 5).
Example: ‘Early’ tax return
Sinead exchanges contracts on the sale of a buy-to-let (BTL) property on 11 March 2024 (so – assuming the sale does ultimately complete – this will be the disposal date for CGT purposes).
The sale completes on 10 April 2024, which starts the 60-day clock for the purposes of the new property disposal return. The new return, together with the corresponding CGT liability on account, would normally be due no later than 9 June 2024.
However, Sinead files her 2023/24 tax return on 31 May 2024. That return, of course, includes the disposal of the BTL property, which means she should no longer need to file the property disposal return or make a payment on account of her CGT liability for the year.
Her overall CGT liability (as part of her self-assessment for 2023/24) will fall due for payment on 31 January 2025, giving her an extra seven months or so to pay off the CGT on the investment property.
But if you thought THIS was bad…
Please spare a thought for non-residents. Their regime, although similar, is much more demanding. In particular:
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It applies to disposals of any UK land, residential or otherwise.
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Notification (a return) is required, regardless of whether a tax liability arises.
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It applies to bodies corporate, as well as to individuals, trusts, etc.
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It applies not just to direct disposals of UK land but also to disposals of interests in entities that substantively derive their value from UK land – most typically, a share sale where the company’s value derives 75% or more of its gross asset value (i.e., before mortgages) from UK land (NB there are some exclusions, such as where the entity is using the land for the purposes of a qualifying trade).
Conclusion
The new regime has generated controversy – and quite a few penalties – since it was introduced.
Selling or otherwise disposing of residential property late in the tax year, so that one has a realistic prospect of filing the corresponding self-assessment tax return before the 60-day post-completion clock runs out, may instinctively seem a bad idea – in the traditional sense, you are deliberately bringing the disposal forward into the tail-end of the preceding tax year, and under the normal self-assessment convention, that would bring the payment date forward by 12 months. But the turnaround time under the new regime is so brief that this can still ‘buy’ you as much as nine months or so to settle the CGT liability.
One final caveat – the exception for prompt filing only works if the self-assessed CGT is at least as much as would have been due if the property disposal return had been filed as usual. While I have yet to see this applied in practice, the logic would appear to try to prevent a rushed self-assessment return with a token CGT liability, pending a more accurate amendment later (TCGA 1992, Sch 2, Para 5 (2)).
