Changes to the reporting of disposals of residential property for UK residents.
From 6 April 2020 changes to the way UK resident individuals, trustees and personal representatives report the disposal of UK only residential property come into effect. The changes will mainly affect those disposing of a second home, a rental property, or properties that have not been occupied as a main residence throughout the period of ownership.
Currently any UK resident individual, trustee or personal representative disposing of residential property is required to declare the disposal on a Self-Assessment Tax Return within nine months following the end of the year in which the property is disposed of.
Any Capital Gains Tax (CGT) due will also be payable by 31 January following the end of the year in which the disposal took place.
Those not within the Self-Assessment system can report and pay CGT using the ‘Real Time’ CGT service but must do so by 31 December following the end of the tax year in which the disposal takes place.
The new rule
From 6 April 2020, in a move to bring UK residents in line with non-UK residents (and to collect tax much sooner), the disposal of residential property will need to be reported to HM Revenue and Customs within 30 days of sale. Gains realised on the disposal of property that has been both residential and non-residential are to be apportioned. For the purpose of the start of the 30-day window, the date of sale is the date of completion and not the exchange of contracts, which is usually used for CGT purposes and will remain the date of sale for CGT calculation purposes. The payment of any CGT due will also need to be made within the 30-day window.
When does the rule not always apply?
This new rule does not apply in all cases. Those whose capital gain is fully covered by Principal Private Residence Relief, brought forward losses or those that have been realised prior to this disposal, their annual exemption or where a nil gain/nil loss arises, will not need to file a Return within 30 days and should report the disposal in the normal way via self-assessment where applicable.
Where a sale of a main residence which is only covered by partial relief e.g. the owner has had periods of absences, will need careful consideration to ensure the 30-day deadline is not missed.
Failure to file the Return within the 30 days will result in a late filing penalty of £100 being charged. Where a Return is still outstanding at 6 and 12 months, penalties of £300 or 5% of the tax due, if greater, will also be charged. Any late payment of the CGT due will incur interest charges. A penalty equal to 5% of the tax outstanding will be charged if the liability is not settled within 30 days of 31 January following the end of the tax year of disposal.
Additional 5% penalties will arise if the tax remains outstanding after a further 5 and 11 months respectively.
Losses available and CGT exemption
When calculating the CGT payable (for residential property gains the rate is normally 18% or 28% or a combination of both), losses available at the date of disposal and the annual CGT exemption can be used alongside a ‘reasonable estimate’ of the individual’s income for the tax year concerned. This is due to the fact that a disposal Return may have to be filed before the end of the tax year.
The estimated tax due will be regarded as a ‘payment on account’ until the actual amount can be calculated and reported to HMRC via the Self-Assessment Return. Any tax overpaid can only be reclaimed once a Self-Assessment Return has been submitted.
Therefore, if you are planning on selling a residential property after 6 April 2020 careful consideration beforehand may be required to ensure that all relevant information can be gathered, CGT calculations, and the required Return(s) prepared to allow for the submission of the Return(s), and the payment of tax due, within the 30-day window.
It is also worth highlighting here further related changes coming into effect from April 2020 which reduce the final period of ownership for private residence relief from 18 months to nine months, and in practical terms abolish lettings relief.
What happens next?
If you would like to discuss any of the above points in further detail, please speak with your usual Baldwins contact or with Praveen Gupta, National Head of Tax.