From 6 April 2020 (the start of the 2020/2021 tax year), the deadline for paying capital gains tax (CGT) following the sale of residential property will change. Sellers will have a substantially shorter period in which to pay the CGT owed – it is presently up to 21 months, but will be reduced to just 30 days.
In the current and previous tax years, individuals who are resident in the UK report chargeable gains as part of their self-assessment tax return. This means that a taxpayer could realise a gain from the disposal of a residential property on 6 April 2018 but will not have to pay the resulting CGT until 31 January 2020 (the deadline for individuals to submit their online self-assessment for the 2018/2019 tax year).
From 6 April 2020, individuals and trustees must report and pay any CGT arising from the sale of UK residential property within 30 days of completion. This mirrors the existing rules for non-resident individuals that have been in place since 2015.
While all the CGT will be due within 30 days, this is described by HMRC as a ‘payment on account’. Those who complete self-assessment tax returns will still need to report the gain on their annual tax return. Depending upon other gains or losses realised in the relevant tax year, additional tax, or a refund, may then be due.
The change will affect UK residents who dispose of residential property where CGT is payable. It is most likely to impact individuals and trustees who dispose of investment properties or second homes. Those selling their main residence, such as the family home, are unlikely to be affected. Any gains on property sales made by these individuals are normally exempt from capital gains tax due to the availability of principal private residence relief (PPR). Trustees will also need to consider whether PPR can apply to their sale.
It is important to note that gifts or sales at undervalue also constitute disposals for CGT purposes. This could create considerable difficulties if, for example, an individual gifts a residential property but lacks sufficient cash to pay the CGT bill within the 30-day period following the gift.
A taxable gain arising from the disposal of UK residential property will be reported through the existing online HMRC CGT ‘payment on account’ system. This is currently used for payments by non-residents disposing of their UK property and the government’s original consultation suggested it would also be adopted for the new regime.
Any capital losses that have already been incurred in the same tax year can be taken into account when submitting the report. However, it will not be possible to amend the calculation if subsequent capital losses are incurred, until the individual later submits their self-assessment tax return.
Individuals and trustees planning to dispose of UK residential property may wish to do so before 6 April 2020 in order to take advantage of the current, longer periods between disposal and payment.
Individuals and trustees who intend to dispose of UK residential property after 6 April 2020 should take advice about the CGT that may be payable, together with the availability of any capital losses and reliefs that may reduce the tax payable following the disposal.
Where an individual or trustees are likely to dispose of UK residential property and other assets in the same tax year, they may wish to give some thought as to the order in which the disposals are made so as to make any capital losses available.
If you have any questions on changes to the CGT payment deadline or wider tax planning issues, please contact us for more information.