From 6 April 2020, UK residents disposing of UK residential property will have new capital gains tax (CGT) reporting and payment obligations. The introduction of a 30-day reporting and payment window marks a significant change to the administration of CGT.
The changes do not apply where a gain is not chargeable to CGT, such as where a gain is covered by private residence relief. The changes will therefore mainly impact on UK residents with second homes or rental properties.
This article produced by Croner-i Ltd summarises the new rules to help ensure you understand and comply with them.
Background to the changes
The introduction of payments on account for UK residents disposing of residential property was first announced at Autumn Statement 2015. The Chancellor justified the change by saying that as CGT on residential property was currently paid between 10 and 22 months after disposal (i.e. the normal self-assessment balancing payment deadline of 31 January after the end of the tax year):
- it was out of step with the position for other taxpayers, such as those subject to PAYE; and
- the delay caused problems where a taxpayer forgets to pay, or where they no longer have enough of the proceeds from the disposal to cover the tax charge.
At that stage, the changes were due to be implemented from April 2019.
At Autumn Budget 2017, it was announced that the introduction of the 30-day payment window would be deferred until April 2020.
HMRC consulted on the changes in Spring 2018 prior to bringing forward draft legislation for consultation in July 2018. The changes were finally legislated in Finance Act 2019.
Finance Act 2019, s. 14 and Sch. 2 implement the changes (as well as replacing and extending the reporting and payment on account rules for non-UK residents disposing of UK land which apply from April 2019).
Overview of the rules for UK residents
The general rule will be that within 30 days of the completion of a disposal of UK residential property by an individual, trustee or personal representative, on or after 6 April 2020, a return (‘residential property return’) and a payment on account must be made in respect of the disposal.
For the rules to apply, a residential property gain must have accrued on the disposal and the person must be required to make a payment on account of their CGT liability. Therefore, where any gain is covered by private residence relief, losses incurred on or before the disposal or the CGT annual exempt amount no return or payment is required.
The reporting and payment requirements will also not apply to:
- no gain/no loss disposals;
- disposals which are the grant of an arm’s length lease for no premium to a person unconnected with the grantor;
- disposals by charities; or
- disposals of any pension scheme investments.
Where a person makes an allowable loss on a disposal, which if a gain had accrued, would have been required to have been reported, the person can make a return to facilitate a repayment.
Where two or more disposals are made on the same day, only one return must be made.
No return is required if the person has submitted or is due to submit, prior to the filing deadline for the residential property return, a self-assessment return which takes into account the disposal.
The payment on account required is the amount of CGT notionally chargeable at the filing date. This is the tax that would be due if, under the normal rules for calculating chargeable gains for a tax year, the tax year ended at the time the disposal is completed. In calculating the amount, only residential property gains are taken into account, but any unused allowable losses for capital gains purposes incurred by the time the disposal is completed, can be used. Available reliefs and the annual exempt amount are applied in the normal way. Anticipated gains and losses on future disposals are not be taken into account.
The amount of CGT payable on account is the amount after applying the applicable rate of tax to the net gain.
Where there is more than one residential property disposal in the same tax year, the amount of CGT notionally chargeable must be calculated after each disposal. But taking into account that all of the gains (or losses) on those disposals are taken into consideration and any new losses that have arisen on disposals of other assets can also be used.
Where there has been a previous return and payment on account for the tax year and the amount notionally chargeable contained in a later return is more than the amount of tax already paid on account, the difference is payable to HMRC.
Where there has been a previous return and payment on account for the tax year and the amount notionally chargeable contained in a later return is less than the amount of tax already paid on account (for example: because of the set off of losses which had not been available at the time of the previous disposal), repayment is due from HMRC on the filing date of the latter return.
Estimates and assumptions
The 30-day reporting and payment window will make it difficult for some people to provide exact figures. The Government accepts this, and the legislation allows for certain estimates and assumptions to be made.
Anticipated future events can be taken into account when determining whether a disposal will be subject to the 30-day return and payment on account rules.
For the purposes of calculating the amount payable on account it can be assumed that any claim, election or notice has been made or given where at the time of the disposal it is reasonable to expect that one will be made or given. This does not affect any requirement to make or give a claim, election or notice in a self-assessment return or in another way, nor the time by when it is to be made or given.
Reasonable estimates can be made of an individual’s taxable income for the year, and of valuations and apportionments, where it is reasonable for the person to do so based on the circumstances and the person’s knowledge at the time.
A person will be able to correct an amount paid or payable on account when they have failed to take into account information available at the time the payment on account calculation was made. If the resulting amount is higher than the amount previously paid, the difference becomes payable to HMRC and interest may be due. If the amount is lower, the difference becomes repayable along with repayment interest from HMRC.
It is understood that if a payment on account proves to be insufficient, as long as at the time the residential property return was made reasonable estimates were used, there should be no interest charges. It will accordingly be important to retain evidence of how any estimates are determined.
Residential property gains reported in a residential property return will be ignored when considering whether a person needs to register for self-assessment.
Individuals who are within self-assessment must report any residential property gain in their self-assessment returns as well as in a residential property return. The self-assessment return will supersede the residential property return.
Amendments and enquiries
The general amendment rules for self-assessment returns apply to residential property returns, although amendments are only permitted so far as the return could have included the amendment by reference to things already done. Where a self-assessment return that takes account of the disposal is or is due to be filed, amendments can only be made to residential property returns up to the earlier of:
- the filing date for the self-assessment return; and
- the date the self-assessment return is filed.
Where a person is not required to submit a self-assessment return, the residential property return can be amended within 12 months of the 31 January following the tax year in which the disposal was made.
Rules regarding enquiries, amendments of returns during enquiries, determinations by HMRC and discovery assessments apply in a similar way as for self-assessment returns.
With over a year to go before the 30-day reporting and payment window is introduced, there is plenty of time for agents to prepare and educate their clients – although this is unlikely to fully prevent some clients from not telling their agent about a disposal until well after the 30-day deadline.
It is vital that HMRC adequately publicise the change, and this is especially true for unrepresented second property owners. If HMRC fail to do so, we are likely to see another raft of penalty cases similar to those for late non-resident capital gains tax returns (NRCGT).
Meg Wilson is a tax writer with Croner-i.
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Document downloaded on 12-03-2019
This article was correct at the date of publication. It is intended as an aid and cannot be expected to replace specific professional advice and judgment. No liability for errors or omissions will be accepted. It is the responsibility of those using the information to ensure it complies with the law at the time of use and that it is used in line with relevant rules and regulations governing the subject matter in question.
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