Changes in capital gains tax on private residences
Rebecca Benneyworth, vice chairman of the Tax Faculty, explores the forthcoming changes to capital gains tax on private residences, focusing on the 30-day payment window and giving practical examples.
There are two phases of change coming in next year, both of which dramatically affect the tax paid on residential property sales by UK resident individuals.
Taken together, these measures seek to raise additional tax from the disposal of residential property and to collect this tax significantly more quickly. For personal taxpayers, capital gains tax (CGT) is paid anywhere between 10 months and 22 months after the date of sale. Bringing this forward to 30 days will give a one-off additional yield of around one and a quarter year’s tax. This is likely to be of the order of between £5bn and £8bn.
This article deals only with the acceleration of the payment of CGT on the sale of residential property. The remaining changes, which reduce the final period of ownership for private residence relief and in practical terms abolish letting relief are still to be legislated for. The Tax Faculty’s response to the consultation on those and related changes is in ICAEW Rep 52/19.
Earlier payment of CGT on residential property
This is the brainchild of George Osborne but has been delayed in implementation. Finally, s14 and Sch 2, FA 2019 included enabling legislation to bring the liability to CGT on gains on disposals by UK residents of residential property forward to 30 days after the date of disposal. The change takes effect for disposals on or after 6 April 2020. It essentially strips out the initial computation of gain from the self assessment system and makes it a standalone report and payment (although self assessment taxpayers will continue to also report the gain on their tax returns).
The scope of the changes are set out in paras 1-2, Sch 2, FA 2019.
- Any direct or indirect disposal of land which meets the non-residence condition which occurs on or after 6 April 2019; and
- Any other direct disposal of UK land on which a residential property gain accrues and is made on or after 6 April 2020.
Non-resident disposals have been subject to a reporting regime since CGT became chargeable on residential property disposals by non residents in 2015. Finance Act 2019 brings all other disposals of UK property of any type within the charge to CGT from 6 April 2019. The change affecting UK resident vendors is the second limb of the legislation, which is the focus of this article.
Where a disposal is within Sch 2, a return must be made within 30 days of the date of disposal (using the completion date rather than exchange of contracts as the trigger date even though exchange of contracts is the date of sale for CGT). No returns are required for no gain/no loss disposals and for disposals where no tax is due. The return must include information to be specified separately and a declaration by the person making it that the return is to the best of the person’s knowledge correct and complete.
Returns may be amended, but only in respect of events that had already occurred at the date the return was delivered. The normal 12-month period is allowed for amending the return.
Enquiries into returns are covered by the normal enquiry rules, and if a self assessment return is subject to an enquiry, then any returns made under this legislation in relation to gains shown on that return are also deemed to be under enquiry. Existing legislation dealing with inaccuracies in returns and late returns are applied to returns under Sch 2, FA 2019.
Payment of tax on account
Tax must be calculated and paid on the disposal, ignoring any other CGT disposals which are not subject to these rules. The tax is due on the date that the return is due; that is, 30 days after the disposal. The tax is referred to as an amount notionally due. The amount paid is referred to as a payment on account of the CGT for the year.
Calculating the tax notionally due
Available capital losses can be offset if desired. Where there is more than one disposal in a year, the tax is calculated on the second disposal, taking into account the first disposal and deducting the tax paid at that time from the total amount due. This means that the cumulative amount of CGT due under these provisions is calculated each time a disposal is made, and the net tax due or overpaid is due for payment or refund.
Note that these are merely interim payments of CGT and the final calculation of the total CGT liability will be performed, as usual, through the self assessment system (for the time being).
Peter sold his buy to let property in June 2020 realising a gain of £40,000. Peter expects to be a higher rate taxpayer in 2020/21. The tax calculated on the gain is £7,840 (this assumes that the annual exempt amount in 2020/21 remains £12,000). This tax was paid as required within 30 days of completion of the sale.
Peter sold some shares in August 2020, incurring a capital loss of £30,000. As a result, Peter has no CGT liability for the 2020/21 tax year but will be unable to claim the refund of £7,840 until he submits his self assessment return after 5 April 2021. This is because an amendment of his property disposal return is not possible as the loss was not a condition existing at the time of the property disposal.
Most firms are unlikely to be aware of disposals of residential property by their clients at the time of the disposal. So even with forewarning, and appropriate messaging to clients, it is unlikely that all disposals will be notified to advisers at the appropriate time.
Experience with the non-resident CGT scheme, and the level of appeals against penalties for failure to submit a return, indicates that we can have little confidence that conveyancers will be geared up to deal with this issue; indeed it is fair to assume that the computations may well be outside their skill set in any event. So there are two pressing issues:
- raising awareness amongst taxpayers of the new requirements; and
- gathering information required to compute the gain within the timescale.
But there is another quite different issue for firms to contend with. In order to establish whether tax is payable or not on a disposal, the sale of the main residence must be reviewed in case the gain attracts partial relief rather than full relief.
It is safe to assume that all clients with buy to let property will be liable for tax on disposals. Appropriate messaging will be required both in the run up to 2020 and annually thereafter. Asking clients to contact their advisers in the event of a planned sale will allow time to gather the relevant information and to advise the client about the potential tax payable, so that funds can be reserved from the proceeds of sale to pay the tax due.
Given the short timescales, advisers may wish to review and update their records of costs and enhancement expenditure so that the files are sufficiently up to date to allow a quick reaction if the client starts to market the property.
This is particularly challenging where the property has been a main residence at some points during its period of ownership as a full fact find will be necessary to establish the chargeable elements of the gain.
Is there tax due?
Clearly, for many of the 1.2 million disposals of residential property in an average year (an average that has remained remarkably stable over the last five years or so) there will be no CGT liability on the disposal having been occupied throughout the period of ownership as the main residence of the owner or owners.
However, absence working abroad or elsewhere in the UK, divorce or separation and other common issues in families today may affect entitlement to relief. Is it sufficient for the adviser or conveyancer to have a simple check box to indicate full relief? Frequently the taxpayer is unaware of the limitations of the relief. How is this gap bridged to ensure that the correct tax is calculated and declared? What about those with a partial gain, which is ultimately covered by the annual exempt amount?
The Treasury’s desire to collect tax more quickly is understandable. However, the signs are already there in relation to the relatively small number of non-resident disposals – this is a difficult change to manage in practice. One must hope that HMRC is willing to apply a light touch to penalty provisions in the early years while conveyancers, advisers and taxpayers familiarise themselves with the rules.
About the author
Rebecca Benneyworth is a tax speaker, writer and consultant, and vice chairman of the Tax Faculty