If I sell a property in April 2020, why should I have to pay tax before someone who sells a property a year before me?
Under current legislation, gains on sale of residential properties by individuals and trusts are reported on a self-assessment tax return. Tax returns for gains arising during the year ended 5th April 2020 are due by 31st January 2021 and those for income received between the 6th April 2020 and the 5th April 2021 are due by 31st January 2022.
The legislation changes which are being introduced from 6th April 2020 will require gains on the disposals of residential property to be reported and any Capital Gains Tax (CGT) to be paid within 30 days of the disposal.
The changes to the CGT legislation have been described as ‘seismic’, and with an average of 1.2 million disposals of residential properties made every year in the UK, the changes will therefore affect a large proportion of these.
Given the sheer scale of the upcoming changes, a few months ago HM Revenue and Customs (HMRC) undertook some research and found that property owners at all levels were unaware of the changes. Even those who did have some knowledge of them found that the information provided by HMRC was difficult to understand and overwhelming due to the volume of information online and “long paragraphs containing financial terminology and unfamiliar terms”.
Luckily, we are here to help you make sense of what is happening so allow us to break it down for you:
From 6th April 2020, where Capital Gains Tax is due on the disposal of a UK residential property by a UK resident individual or trustees of a trust, a new standalone online return will need to be filed within 30 days of the date of completion of the transaction.
A payment on account of the Capital Gains Tax due must also be paid within the 30 days.
The return must include information relating to the property, and a declaration by the person making it that the return is, to the best of the person’s knowledge, correct and complete.
No returns are required where no tax is due. This is a welcome relief from HMRC as when similar legislation was introduced requiring disposals by Non Resident landlords to be reported regardless of whether tax was payable or not, many misunderstood the rules and did not submit returns which resulted in penalties being levied even where there was no tax to pay.
In more detail
Although usually the date of exchange of contracts is the date which determines which tax year a disposal by an individual must be reported in, HMRC have confirmed that in the period of transition, the completion date will be the trigger date for the new return.
Therefore, if a UK resident individual, exchanges contracts to sell a property under an unconditional contract on or before 5th April 2020 even if completion takes place after 6th April 2020 the gain accruing on the disposal will be included on the 2019/20 self – assessment return.
If however, the exchange of contracts takes place on or after 6th April 2020, or the contract is conditional and the condition is not satisfied until after 6th April 2020 the gain will fall within the 2020/21 tax year. The individual will be required to make a return to HMRC within 30 days of completion of the transaction together with a payment on account within the same 30 days’ timescale. Going forward, the tax year in which disposals fall will follow the date of completion.
The penalties for not filing the UK land return within 30 days of the disposal start at £100. If the return is more than 6 months late a penalty equal to the higher of £300 or 5% of the tax due is payable. If the return is more than 12 months late, a further penalty of either £300 or 5% of the tax will be charged.
Are there any exemptions?
Some common examples of where a UK land return will not be required are:
- Disposals of commercial property
- Disposals of residential properties made by companies, charities or pension funds.
- The disposal of a taxpayer’s principal private residence – i.e. the property he lived in throughout the duration of his ownership
- If a loss arises on the sale of the property
- If the taxpayer made losses on capital gains completed before the current disposal these can be offset against the current gain.
- If the gain is small enough to be covered by the individual’s annual exemption for the year of disposal. In the tax year 2020/21, the annual exemption is £12,500.
Aside for the tight deadlines and cash flow issues which arise, a computation will have to be made every time a sale takes place to ascertain whether tax is payable – and calculating the potential tax payable is not straightforward!
There are two rates of capital gains tax which apply to disposals of residential properties – 18% for basic rate taxpayers and 28% for higher rate taxpayers. In addition, taxpayers are allowed an annual exemption of £12,500 (for the 2020/21 tax year) at which no tax is payable.
Previously when computing tax payable on disposals, the taxpayer would know all of their income and all the other profits and losses made on disposals. This would give the accountant a complete picture of the taxpayer’s affairs and would allow the correct rate of tax to be applied.
Under the new legislation, the taxpayer could be required to calculate the tax before he has even completed his tax return for the previous tax year! He may not know if he should calculate the tax at the 18% rate or the 28% rate, or if he has any losses from the previous year which can be offset against this gain.
Matters are further complicated where a property is a mixed commercial and residential site, as only the tax on the residential portion is payable within 30 days requiring the gain to be apportioned.
HMRC recognise these difficulties and allow the taxpayer to make a reasonable estimate of the gain – however where too much tax was paid, any refund will only be received when the annual self-assessment tax return is made.
Penalties will be levied if HMRC consider that the taxpayer deliberately computed a too low rate of tax.
What you may not have thought of
As previously mentioned, a return does not have to be made if there is no tax to pay. However – like all things tax, it’s never that simple.
If a disposal was made with an overall worth of more than four times the CGT allowance (£50,000 for the 2020/21 tax year), a return still needs to be made.
Where a gift of property is made to a child, this is considered a disposal to a connected person and for tax purposes it is treated as if the sale was made at market value and capital gains tax will be payable within the 30-day timeframe.
This is an important case because under these circumstances (i.e. where no consideration is received for the deemed disposal) the person making the gift can elect to pay the tax in ten annual instalments with the first instalment payable on the day the tax would usually fall due.
Therefore, if you are considering making a gift, doing so before the 6th April 2020 will enable the first instalment to be delayed until the 31st January 2021.
Any other points?
We mentioned that no tax is payable where the property is the principal private residence of the vendor. However, there are circumstances where some of the gain will still be chargeable. These include where the property has been let or was vacant for part of the time it was owned, or where there are extensive grounds some of which may not be considered part of the property for Principal Private Relief purposes. Make sure you discuss this with your accountant.
So, what should I do?
If you are considering selling or gifting a property, give some thought to bringing the sale forward.
Be in touch with your accountant as soon as you anticipate a sale going through so that you can ensure you both have the information which will be required to compute the potential gain, such as the date the property was purchased, its initial cost and that of any improvements.
Whilst HMRC have started testing the system for submitting the new returns, they have not released the actual form yet! The above is only a brief overview of the rules and there is likely to still be some confusion come the 6th April. So make sure that you review your portfolio and have the necessary information prepared and discuss this with your accountant.
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