Lee Sharpe looks at the new tax regime when selling UK land and property from 2020/21.
The UK tax regime has become significantly more demanding of those selling residential property in the UK.
While UK tax-resident individuals and trustees will need to concern themselves only with UK residential land, non-residents (including non-resident companies) also need to apply the new rules broadly to the disposal of any land or property in the UK – in fact, non-residents have had to put up with this regime for some time.
Report and pay capital gains tax
For disposals on or after 6 April 2020, an individual or trustee resident in the UK for capital gains tax (CGT) purposes will have to report the disposal of any residential property in the UK, within 30 days of the date of completion.
He or she will also have to make a payment on account of their estimated CGT liability, also within 30 days of completion.
Note that the clock starts from completion, not the day on which contracts are exchanged. For CGT purposes, the date of exchange of contracts is almost always the key date for determining when a disposal actually took place, but one cannot say that a transfer of land has actually taken place until it has been completed.
Why the change?
This is nothing more than a ploy to get more money out of taxpayers, faster.
Historically under self-assessment, you might get up to almost two years to settle the CGT due on a taxable disposal – a disposal on 20 April 2019 would fall at the beginning of the 2019/20 tax year and be reportable in the 2019/20 self-assessment tax return, with payment due on 31 January 2021.
But I’m already in self-assessment?
Tough! As many non-resident landlords have already found out to their cost, the new responsibility is in addition to any ongoing obligation to report under self-assessment that landlords or landladies might generally have.
Non-residents have had to put up with broadly similar obligations since April 2015.
Implications for the vendor
Ironically, a disposal completing on 20 April 2020 will be reportable by 20 May 2020. So you will actually have to report and pay for a disposal in April 2020 about eight months before you have to report and pay for a disposal from April 2019!
Under the ‘old’ regime, a delay of up to almost two years meant that there was good scope to apply rental profits towards the eventual CGT bill, and preserve capital for re-investment. Bearing in mind that the options to roll over a capital gain on residential property are practically non-existent, the new regime means that a property investor who does not have further cash resources available will be more likely to have to downsize if and when re-investing, assuming the capital gain is substantial (or take on more debt – with the associated additional tax cost for restricted relief for mortgage interest, etc.).
Exemptions from reporting
Essentially, there is no obligation to report or pay, if there is no CGT to pay. So individuals or trustees will not be required to make a report if:
• They are selling their only (or main) residence and it is 100% relieved (but see ‘Traps’ below);
• They make a ‘no-gain/no-loss disposal’ (typically between spouses, or civil partners, where living together as a couple);
• They have losses brought forward that will offset the taxable gain;
• The capital gain is covered by the annual exemption (£12,300 in 2020/21 per claimant).
Traps
- Transfers to other family members – Property owners often assume that the ‘spouse exemption’ applies to other close family members; frequently, to their children. It does not, and CGT will generally be due on transfers involving non-spouses/non-civil partners.
- Gifts – It is likewise commonly assumed that there is no CGT on gifts because there are no money proceeds. This is wrong. The main rule is that HMRC is entitled to profit from your generosity as if the asset has been sold for full market value, when there was any intention to confer a gift or discount. This applies to transfers between strangers as well as between connected parties such as relatives (ignoring spouses, etc.).
- Principal private residence relief – The relief is less likely to cover gains 100% from 6 April 2020, because:
- The ‘deemed occupation’ rule, which used to allow the owner to treat the property as having been occupied as the main residence for the final three years of ownership, has been cut from April 2020 to just nine months.
- a particularly nasty trap lies in wait for those who will assume that they are still covered by lettings relief when they rented their main residence out umpteen years ago. The new ‘reform’ of lettings relief introduced from April 2020 means that it will almost never be available (the owner essentially has to remain in occupation). This ‘reform’ applies retrospectively, to any period of letting, even before 6 April 2020.
Practical aspects
Individuals (and trustees) will have to make several returns and payments a year if they make more than one reportable disposal. The later return is supposed to take into consideration any previous disposals, broadly to get as close as possible to the ‘right’ figure for CGT.
HMRC set up a home page to warn property owners about such disposals on 25 February 2020, promising that a new online facility to report and pay the CGT would be launched and that guidance would be fully updated in April 2020. Ironically, the page is entitled ‘Get Ready for Changes to Capital Gains Tax Payment for UK Property Sales’ and it does not seem overly churlish to suggest that HMRC should have heeded its own advice a long time ago.
The calculation of CGT and the payment on account now required will be based on the full consideration due. Staged payments and payments other than in cash are quite rare in arm’s length property transactions; expect them to be even more so from now on.
Clients and advisers will struggle to compile all the information necessary to calculate the CGT due within 30 days, particularly if the property has been held for a long time and old records need to be dug out. Clients and advisers are going to have to get much more proactive when dealing with property disposals, so that clients know to contact their advisers before selling a property.
Conclusion
When I said that this was nothing more than a ploy to get more money out of taxpayers faster, note that I did not say “more capital gains tax”; I said “money”, because penalties will feature large in HMRC’s reckoning of how much additional revenue this new regime will generate.
A similar obligation has been around for non-residents for several years and HMRC’s own figures suggest that more than a third of those in-year reports from the first couple of years since introduction were filed late, and roughly a third of the money raised from the regime was from penalties, not tax. HMRC’s efforts to warn non-residents of the changes amounted to little more than the Budget speech itself and accompanying press releases, and a few tweets – a point which has been raised in more than one tribunal case since.
Advisers will need to consider whether they have, or should have, stepped in to warn clients sufficiently about the new regime, effectively to cover HMRCs’ abject failure to have done so. The cynic in me finds it difficult to conclude otherwise than that HMRC’s failure to learn from the problems caused by the introduction of the regime for non-residents is anything other than deliberate.
Meanwhile, it may be worth noting that UK-resident companies do not fall within the scope of this new regime, and will continue to enjoy reporting and payment lead times comparable with income tax self-assessment prior to 6 April 2020. It might almost make one wish to incorporate.
