The Association of Taxation Technicians (ATT) is warning that owners of second homes and buy-to-let (BTL) landlords may face a much shorter period in which to pay any capital gains tax (CGT) due on property sales from April 2020.
Where CGT is due, a disposal is normally reported to HMRC in a self-assessment tax return. Under self-assessment, any CGT must be paid by 31 January following the tax year of disposal.
The government has noted that (depending on the timing of the sale within a tax year) this allows residential property owners between 10 and 22 months after the sale of the property before the tax is due.
Concerned about the length of time before any CGT is paid, HMRC are planning to bring in new rules from April 2020 which will require individuals and trustees disposing of a residential property to make a payment on account of the CGT within 30 days of the completion of the sale. Sellers will have to calculate, report and pay the CGT that they believe is due within that window.
For a disposal made in the current 2018/19 tax year, an individual or trust self-assessment tax return is due by 31 January 2020. While the individual or trust may make payments on account for income tax due in 2018/19 during the year, any CGT for that period is not due until the 31 January 2020.
If an owner exchanged contacts for the sale of a house on 15 April 2019 and the sale completed on 15 May 2019, the existing rules would apply and mean that any CGT arising would be due on 31 January 2021. By contrast, under the proposed rules, an exchange of contracts on 15 April 2020 with completion on 15 May 2020 would mean that the CGT had to be paid by 14 June 2020 – over seven months earlier than if the property had been sold in the previous tax year and indeed before any CGT was due for the previous tax year.
CGT is generally charged at a rate of 18% or 28% on the taxable gain for residential property. The rate depends on the income tax rate of the tax payer. A higher rate taxpayer will pay 28% on the gain while a basic rate taxpayer will pay 18% on as much of the gain that fits within their unused basic rate band, and 28% thereafter. For Scottish taxpayers the higher rate position is determined by UK-wide income tax rates.
Commenting on the proposals, ATT’s Technical Steering Group Co-Chair John Stride said that such ‘in year’ reporting may create complications as many individuals will not know what rate of tax will apply at the time of disposal. Equally, individuals may make other disposals in the year liable to CGT which might affect the position. After making an ‘in year’ report, individuals will therefore need to review and revise the computation at the end of the tax year, either as part of their usual self-assessment procedures or via new ‘end of year’ reconciliation process. This will increase the compliance burden for taxpayers.
A particular area of concern is the treatment of capital losses, says the ATT. Under the current proposals, the taxpayer will only be able to take into account of losses which are known about at the time of disposal. If they incur more capital losses later in the same tax year, then it is likely that the original payment on account of CGT will be found to be too large. However, they will not be able to reclaim any overpayment until after the tax year has finished. This could leave the taxpayer out of pocket for some months, warns the ATT. The only time that capital losses realised after the disposal of the property can be taken into account is if the taxpayer disposes of further residential property in the same tax year.
When similar ‘in-year’ reporting rules were introduced for non-residents disposing of UK residential property, many individuals only realised they should have reported their disposals earlier when they came to complete their self-assessment return after the end of the tax year. In ATT’s response to a HMRC consultation on how to administer the change it has expressed concerns that UK individuals may also miss the earlier deadline and have asked HMRC to consider a ‘soft-landing’ for penalties in the early years of these new rules.
The association’s response to a HMRC consultation on how to administer the CGT changes highlights concerns that UK individuals may also miss the earlier deadline and have asked HMRC to consider a ‘soft-landing’ for penalties in the early years of these new rules.
Stride said: ‘If the government wants to accelerate tax payments in order to minimise possible loss to the Exchequer, we would like to see a wider debate on the timing of payment of tax rather than payments on account being introduced in a piecemeal fashion over a number of different assets or income sources. A broader debate would enable HMRC to identify clearly the specific areas of concern and the risks to tax collection and thereby enable identification of possible solutions.’
It’s worth noting that the new rules should not impact on people selling their only or main home, provided that they are entitled to full private residence relief which exempts them from having to pay CGT on the sale.