As attention turns to the 31 January deadline for submitting trust, estate and personal tax returns there is also another significant date on the horizon for taxpayers.... and also solicitors and other advisors dealing with residential properties.
A little known policy paper published by HMRC on 6 July 2018 set out the new payment window for residential property gains. The aim of the policy according to HMRC is to "ensure tax is paid sooner in respect of gains from residential property to reduce error and increase compliance". This will change reporting and payment of capital gains tax (CGT) for residential property sales.
It seems that there is a general lack of awareness among taxpayers of the new rules which impact disposals of residential property after 6 April 2020. It is certainly something that needs to be considered by those anticipating residential property sales in the first half of 2020.
If a sale of residential property was to take place before 6 April 2020 the tax on any gain over the annual exempt amount would be due by 31 January 2021. If the sale was to take place on or after 6 April 2020 the tax would be due 30 days later. Some sellers may prefer to plan a sale prior to the new rules coming into force on 6 April in order to have a longer window in which to pay any CGT due.
Payment of capital gains tax on disposals of land under current rules
Under current rules depending on when a disposal is made in the year a taxpayer will have between 10 and 22 months before CGT needs to be paid. Where the taxpayer makes a gain on a disposal of land they must report the gain in their tax return by the 31 January that follows the end of the tax year in which the disposal was made. The tax due also needs to be paid by this date. A relatively leisurely window for both reporting to HMRC and settling any tax due.
Example 1 - David
David is a UK resident taxpayer and sold a residential property (not his principal residence) on 10 May 2019 and realised a significant gain which exceeded his annual CGT exemption. David is obliged to report the gain on his tax return for 2019/20 and pay the tax due to HMRC by 31 January 2021.
UK land disposals 2019/20 by individual/trustee - summary of deadlines
Reporting method: self-assessment
Reporting deadline: 31 January following end of tax year of disposal
Tax due date: 31 January following end of tax year of disposal
The new rules
From 6 April 2020 the gain must be reported and any tax paid within 30 days of the date of completion of the sale.
Example 2 - Mike
Let us assume the same facts but with David's brother Mike and fast forward a year. Mike sells a residential property on 10 May 2020. As the gain is in excess of Mike's annual CGT exemption he is obliged to report the gain to HMRC and pay any tax due by 9 June 2020. If the gain was within Mike's annual CGT annual he would report the disposal in his 2020/21 self-assessment return in the usual way.
UK land disposals after 6 April 2020 by individual/trustee - summary of deadlines
Reporting method: tax return (completed at time of disposal)
Reporting deadline: 30 days after date of disposal
Tax due date: 30 days after date of disposal
It would be reasonable to ask how we calculate the gain on a disposal in isolation. What is being paid to HMRC in the Mike example is 'notional CGT', there is an acceptance by HMRC that the information provided, and the tax paid may change later on. Taxpayers will be able to compute the notional CGT due taking into account reliefs that may be available, provided the conditions are met at the time of the disposal. The reliefs should then still be recorded in the annual tax return. On one view this may lead to more confusion and potential under declaring by those omitting to update information by the time the annual tax return is prepared. At the very least the current system uses values that have already been determined as the current system of CGT reporting (on the whole) looks back and not forward.
The changes also impact non-UK resident individuals and trustees who are within the scope of self-assessment in much the same way as for UK residents. Those who are not within the self-assessment regime are already obliged to report a gain and pay any tax due within 30 days of disposal so in these terms may not recognise that much has changed. The rules seek to equalise the position between UK and non-UK residents taxpayers.
Please see my colleague Heather Thompson's recent blog with more on how the new rules impact non-UK residents.
This blog is intended as a snapshot of the new rules and there will be other variables that may influence the position over and above what has been outlined above. Such as, where there are losses to be taken into account or where the disposal is of a mixed residential/commercial property.
Please get in touch with me or one of the team should you wish to discuss further.