Capital gains tax changes

Christopher McNeill says: be aware the transition period at the end of the tax year in which two reporting systems might apply to the sale of UK residential property.

A number of CGT changes for residential property come into effect on 6 April 2020, in the case of a main residence halving the final period disregard from 18 months to 9 months and also greatly restricting the lettings relief available. Only landlord who still live in part of the property themselves will be able to claim this type of relief.

The reduced final disregard can have significant impact on couples separating or divorcing but a more immediate impact for all taxpayers will be the requirement, after 5 April 2020, for any CGT due to be paid and reported within 30 days of the disposal being completed. Taxpayers are expected to use the new online “real-time” CGT reporting system (which HMRC is still trialling). Tax paid is treated as a “payment on account”.

Until now, UK residents reporting Capital Gains Tax (CGT) due on a disposal of residential property, whether by gift or sale, have been able to do so right up until the end of the January following the tax year in which the disposal took place. In fact, a normal ordinary Self Assessment (SA) Return will still be needed in most cases, to be  submitted within the current time limits, since the real time reporting system requires only the tax itself to be reported, not the actual gain.

The system raises a number of traps for individuals, personal representatives and trustees, not least of which is that it does not apply to all disposals:

• No loss / no gain disposals
• Non-residential property
• Any gain is wholly covered by reliefs such as main residence relief or by losses brought forward
• The disposal itself realises a loss.

Without proper planning, the tax payer may not always be able to assess whether the disposal falls within these exceptions in the short time allowed or to calculate the tax due. A further limitation is that losses of the same tax year will only be available if they have already been incurred. Any later losses will have to be included in the SA Return. Partially residential property will involve an apportionment of reportable gains.

Gifts will now have to be planned so that the tax can be found within 30 days of the gift taking place. So far there are no special rules where the tax is in fact to be met by the done so the onus will be wholly on the donor to report and pay tax.

For sales, a key point of the new system is that it measures the 30 day limit from “completion” of the disposal. The normal rule for determining when a disposal by sale takes place remains the date of exchange of contracts so that a sale may fall across two tax years as in the example below.

What may not be appreciated is that the new CGT report is not required if a normal SA return has already been submitted. As long as the taxpayer has done this before the deadline for reporting under the new system, the new system has no other impact.

Towards the end of the tax year, therefore, the taxpayer must take particular care. If contracts to sell are exchanged before 6 April 2020, the old rules still apply regardless of when the sale completes and the disposal must be included in a normal SA Return anyway. But, because of the point about “completion” of the disposal, if the tax payer does not submit the SA Return soon enough a CGT report will be required as well.

Example

1) Alice exchanges contracts to sell her buy to let property on 1^st April 2020; she has agreed to a delayed completion, which is set for 1^st June, allowing certain works to be carried out before the sale is completed.

Alice then submits her normal SA Return for 2019-20. In order to avoid the CGT report due under the new rules she does so before 1^st July, i.e., within 30 days of completing her sale.

As long as Alice meets this deadline, the new system will have no other relevance and her SA return will be processed by HMRC in the normal way. Any tax due can be paid at any time up to 31 January 2021 without any penalty arising.  Since the disposal will have taken place near the end of the tax year, the taxpayer will also have full knowledge of any available losses already realised.

Had Alice filed any later than 30 June 2020, then similar penalties would apply as for the late filing of the normal SA return and would do so even if that SA return is later correctly completed and submitted within the existing time limits.

2) Alice sells a further buy to let property one year later, exchanging contracts on 1^st April 2021 although this time completion takes place within the more usual four weeks, viz., 29^th April 2021. If now Alice files her SA Return any later than 28 May 2021, the liability to account for and pay CGT will have crystallised and a CGT report will have to be filed as well.

For sales towards the end of the tax year, the taxpayer should ensure that if at all possible the old system is used, in which case it is still essential to ensure that the normal SA Return is submitted before the new CGT report becomes due. For sales at other times, the taxpayer should be ready to report under the new system  and have assembled the information in advance to determine if a new style report is actually needed.

Similar penalties will apply as for the late filing of the normal SA return and will do so even if the SA return itself is correctly completed and submitted well within the existing time limits for SA Returns.