Individuals are currently required to report any capital gain and pay any tax on the sale of residential property through self-assessment.
From 6 April 2020 new rules will come into force requiring a UK resident individual or trustee making a taxable capital gain on the disposal of UK residential property to submit a ‘residential property return’ to HM Revenue & Customs (‘HMRC’), together with a payment on account of capital gains tax (‘CGT’), within 30 days of completion.
The new rules will therefore significantly reduce the time between the date of sale and when the CGT must be paid.
Currently when a UK resident individual sells a residential property they must declare it on their self-assessment return and pay any capital gains tax (‘CGT’) arising by the 31 January following the end of the tax year in which the disposal took place. This potentially gives anywhere between 10 and 22 months after the date of sale before the gain needed to be reported or the tax paid. The CGT on any residential property gain is currently subject to the higher rates of 18% or 28%.
The new rules significantly reduce this time scale, with all disposals of residential property on or after 6 April 2020 required to be reported to HMRC and the estimated capital gains tax paid within 30 days of the date of completion. The disposal date for CGT purposes remains the date of exchange of contracts. Therefore, any exchange of contracts under an unconditional contract before the 6 April 2020 will not be subject to the new rules even if the completion date takes place on or after 6 April 2020.
Individuals will be required to submit the residential property return to HMRC online. The tax payer will need to register online with HMRC in order to access this online process. Where properties are held jointly or in partnership, each owner will be required to submit a return and pay the tax in respect of their share of the disposal.
The tax payer will be required to pay an estimate of the CGT due, calculating the CGT based on their expected income levels. This payment will be treated as a ‘payment on account’ against their total income tax and CGT liability for that tax year. The gain on the residential property will still need to be included on the self-assessment return for that tax year, and it is at this point that any refund or additional liability will be calculated. If, upon filing the self-assessment return, additional tax is due then interest will be also be payable.
For those individuals not under self-assessment then the completion of a residential property return and the payment of CGT will satisfy their reporting requirement and they will not be required to register for self-assessment unless their other circumstances dictate they should do so. Individuals should however review their position at the end of the tax year to ensure that they have paid the appropriate CGT on the residential property disposal.
There are some exceptions to the requirement to submit a return within the 30 day period. The most common examples of when a return will not be required are:
- Where the gain is covered by principal private residence relief (‘PPR’) throughout the tax payers period of ownership
- If a loss arises on the sale of the residential property
- The gain is covered by capital losses arising before the sale takes place
- The gain is fully covered by the individual’s annual exemption for the tax year.
Penalties will apply if the return is filed late, with £100 payable if the return is filed after the initial 30 day period. For returns more than 6 months late an additional penalty equal to the higher of £300 or 5% of the tax due will be payable, and for returns more than 12 months late, a further penalty of either £300 or 5% of the tax due (whichever is higher) will also be payable. HMRC could also impose a £10 daily penalty for up to 90 days (between 3 months and 6 months of the filing date).
The changes to the reporting and paying of capital gains tax on residential property sales from 6 April 2020 therefore means these obligations need to be considered by the individual immediately on completion rather than being left until the end of the tax year or on preparation of the individual’s self-assessment tax return. It would, therefore, be prudent for individuals considering selling a residential property to seek advice on completing the return and estimating the likely CGT liability as soon as possible on placing the property on the market.
If you would like more information on how the new rules may affect you or would like assistance in preparing for a residential property sale, please contact our Tax Director, Jenny Marks.
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