From 6 April 2020, changes were enforced by the HMRC requiring any sale of UK residential property to be reported with any capital gains tax (CGT) due being paid within 30 days of the completion of the sale. These new rules have accelerated the payment of CGT in some cases by up to 18 months. The new legislation applies to individuals and Trusts but not yet to companies.
A similar regime has been in place for non-UK residents who are still required to report sales or disposals of interests in UK property or land, irrespective of whether there is a CGT liability (within 30 days of completion of the disposal). This includes disposals of residential properties, non-residential properties and indirect disposals. These new rules only affect UK residents who dispose of UK residential properties; commercial properties sold by UK residents are still under the existing regime.
It is likely, as lockdown restrictions are easing and given the current ‘SDLT Holiday’, that disposals of UK residential property will be increasing in number. It is therefore important to be well informed with the reporting changes to avoid any potential penalties from HMRC.
What about penalties?
Usually, you would pay interest or a penalty if gains on a property are not reported within the given timeframe. However, although these rules came into effect from 6 April 2020, HMRC announced that they will not charge penalties until 31 July 2020. Thus, any transactions completed prior to 1 July 2020 cannot be liable to late filing penalties as long as the Return has been submitted and tax paid by 31 July 2020 (interest charged is subject to independent cases). Transactions completed thereafter will have to comply with the 30-day submission and payment deadline to avoid penalties.
Calculating the gain
Your gain is usually the difference between what you paid for your property and the amount you received when you sold it. However, in the calculation of the taxable gain of a disposal, only capital losses already realised, prior to the disposal, can be deducted. If losses are realised after the disposal of the property, these can only be claimed and reported via the Self-Assessment Tax Return. This can have a negative impact on an individual’s cash flow, having already paid HMRC yet unable to reclaim this tax. Where you have predicted losses, it may be best to review these, alongside relevant professional advice, on how best to time your disposals.
With the 30-day window being tight, HMRC will accept ‘best estimates’ at the time of the Return, with amendments being available within 12 months. Otherwise, you can report the corrected position on your Self-Assessment Tax Return, with the payment of CGT being treated as a payment on account against your final tax liability for the year.
We would advise that, prior to the disposal, you collate the information concerning the purchase costs to make the calculations for the Return easier to complete within the 30-day window. In addition, we would suggest contacting your tax adviser when you market your property, to enable them to explain the process in more detail, ensure your records are up to date and that you submit the return by the deadline.
Private Residential Relief and Lettings Relief
Further legislative changes were also implemented by HMRC on Private Residential Relief and Lettings Relief. If a property at any time had been your primary residence, the final 18 months of ownership were exempt from CGT. For disposals from 6 April 2020, it is now reduced to only 9 months. This will not affect the 36-month exemption where owners have left their primary residence due to disability or if they are moving into a care home.
The definition of Lettings Relief has changed in that no lettings relief will be offered unless the owner of the property has been in shared occupancy with their tenant. In effect, this now allows only live in landlords to claim this relief, whereas previously a couple owning a second home (that they let out) could claim up to £80,000 of relief on the disposal of the property.
Unfortunately, there are no provisional rules for either of these reliefs. If you dispose of a property after 6 April 2020, the disposal will be treated with the new definitions for the reliefs. These calculations, to report the accurate gain on the disposal of the property, are restricted to the 30-day window, so it is best to be aware and be prepared prior to your property being sold.
It is important to plan accordingly, so please direct any queries about planned or completed disposals of UK residential property to Phil Clayton on +44(0)20 7516 2412 or at firstname.lastname@example.org. You can also download our Disposing of UK residential property guide for more information.