Whether they’re selling due to changes in the tax regime or simply because of market conditions, landlords looking to offload residential property need to be prepared to meet their CGT compliance obligations, says Gillian Banks.
Rising interest rates combined with the finance cost restriction are having an impact on cash returns for landlords. Property prices are also falling. While many landlords may be able to weather the storm, others may be unable to remortgage when their fixed term comes to an end due to affordability and increases in loan-to-value ratios.
On 17 November 2022, the Autumn Statement announcement by Chancellor Jeremy Hunt that the capital gains tax (CGT) annual exempt amount will be reduced from its current £12,300 level has added urgency for some to sell up. The annual exempt amount will reduce to £6,000 for the 2023/24 tax year and then £3,000 from April 2024. It last stood at this level in 1982.
Preparing for 60-day reporting
Since 6 April 2020 a return must be made within a tight timeframe following the completion of the sale of a UK residential property if tax is payable (currently 60 days). Non-residents need to report the disposal of all UK real estate, regardless of whether tax is payable. The return is known as a CGT on property disposal (CGT PPD) return and is filed digitally using HMRC’s UK property service.
Although the extension of the time allowed to file a CGT PPD return from 30 to 60 days in October 2021 was welcome, 60 days is still a tight window. As this process falls outside the normal tax year compliance cycle, it is recommended that taxpayers are regularly reminded to get in touch with their agent should they be considering selling property. They can then be reminded to assemble the information they need to prepare the return and tax calculations.
Typical data required for the return and tax calculations will include:
- address of property, including the postcode;
- purchase date (generally exchange of contracts);
- purchase price including stamp duty, legal and any other deductible acquisition costs;
- cost of improvements reflected in the state or nature of the property at the time of sale;
- if the property has ever been used as the owner’s main residence, the dates when that was the case;
- in due course, the sale proceeds and date of sale (exchange to determine into which tax year the disposal falls, and completion to determine when the CGT PPD return needs to be submitted by);
- costs of sale such as legal expenses and estate agent’s fees; and
- an estimate of taxable income for the year (to determine the applicable rate of CGT).
Clients must register to use the UK property service
Agents cannot prepare CGT PPD returns through the UK property service until their clients have registered with HMRC to use the service. Taxpayers should do this as soon as they have completed the sale.
They will need a Government Gateway user ID to set up their CGT UK property account, so that may need to be created first. Two forms of ID will be required so that HMRC can verify the individual’s identity. The list of ID that can be used was expanded in July 2022 following complaints that many people could not register. However, there is still a significant number who cannot access the process online due to lack of acceptable ID. Non-residents may have difficulties in establishing their identities to obtain a Government Gateway ID, as often they won’t have a national insurance number or unique taxpayer reference (UTR). In these circumstances they should contact HMRC for assistance.
There then follows the “digital handshake” to authorise the agent. Note that any existing 64-8 or other authorisation will not enable an agent to submit a CGT PPD return, as this is a completely separate system. The system is also not connected to individuals’ personal tax accounts.
Taxpayers genuinely unable to complete the process electronically, even with help from HMRC, will be issued with a paper return. At the time of writing these are only available by calling HMRC. However, it is understood that they may be available to download on a trial basis soon.
Completion of the CGT PPD return
Once the authorisation is in place, agents can manage the client’s UK property account, and complete the CGT PPD return. The return itself is relatively straightforward provided all the required information has been collected.
Draft returns are saved in the system for 30 days (and a further 30 days if amendments are made). Check though that any attached files are still there before submission because they are only saved for a few days.
After obtaining the client’s approval, the return can be e-filed through the UK property account.
Payment of the tax
After the return has been filed, the agent and client will receive an email confirmation from HMRC. The client can then log into their property account and pay the amount due. The payment must be into the taxpayer’s UK property account (not their self assessment account), using the payment reference that has been provided in relation to the property account or the CGT PPD return that has been submitted. Successful payment can later be checked also via the UK property account.
Where a paper return has been submitted, taxpayers must wait until a payment reference is issued to them by HMRC. They should not attempt to make payment using their UTR as a reference. Payment is due by the later of 30 days from the issue of the charge notice, or 60 days from completion. Unsurprisingly, it is understood that there is a backlog in processing paper returns.
Is a self assessment return required too?
If a client is not within self assessment (and apart from the disposal reported on the CGT PPD return has no reason to be), then assuming that the tax calculation and the gain reported is correct, and nothing has changed subsequently (eg, realising a capital loss later in the tax year), nothing more needs to be done.
CGT PPD returns can only be amended in specific circumstances (eg, where estimated income changes, or a figure needs to be corrected). Paper returns can only be amended by submitting a further paper return. In most other circumstances that change the CGT liability, a self assessment return will be required.
A peculiarity of the legislation is that capital losses realised up to completion can be deducted from a property gain, but non-property losses arising later can only be offset on a self assessment return. Once the self assessment return has been submitted, any CGT PPD returns can no longer be amended.
If a later UK property disposal results in a loss, another CGT PPD return can be submitted and a refund claimed. This does not happen automatically. Nor will the UK property account show an overpayment. The taxpayer or their agent will have to call HMRC to arrange repayment.
Individuals in self assessment should report the total of gains and losses from their CGT PPD returns in the capital gains pages of their self assessment return, along with the total tax paid/refunded. The CGT PPD return references should be entered into the white space. Remember that for self assessment it is the unconditional exchange date rather than the completion date that determines which self assessment return the disposals should be reported on. The correct final CGT figure is then calculated and included in the overall tax calculation for the year. There have been teething problems as it appears that the systems don’t always communicate with each other effectively. Check calculations carefully, and contact HMRC if there are discrepancies.
Once a self assessment return has been submitted for a tax year, the UK property system will prevent any CGT PPD returns from being submitted online. So if a taxpayer has failed to submit a CGT PPD return previously, they will need to complete a paper return (notwithstanding they have already reported the disposals on their self assessment return).
A few really organised individuals may be able to avoid completing a CGT PPD return. If their exchange is quite late in a tax year and they manage to submit their self assessment return within 60 days of completion, no CGT PPD return will be required. This also means that the CGT will not be due until the following 31 January. Given that some taxpayers will be attempting to achieve a sale on or before 5 April 2023 to benefit from the higher CGT annual exempt amount, the ability to report once via self assessment could prove to be a welcome bonus.
Business asset disposal relief (eg, for furnished holiday lets) can be claimed on the CGT PPD return, but will need to be reported slightly differently on the self assessment return. The SA108 guidance notes provide advice.
Gillian Banks, member of the Tax Faculty’s Private Client sub-committee and a volunteer for charities TaxAid and Tax Help for Older People
- Prepare for submitting returns and tax calculations by gathering as much data as possible in advance of the property sale.
- Taxpayers should prepare for setting up a UK property account. This might include obtaining a Government Gateway ID.
- If the exchange is towards the end of the tax year, consider whether it is possible to file a self assessment return within 60 days of completion.
- Ensure that losses are claimed in the correct return and that repayments are claimed by calling HMRC, where necessary.
- Ensure that payments are made to the UK property account and not the self assessment account.