From 6 April 2020, a number of changes to capital gains tax came in that impact on both the main residence reliefs available when a property is sold, as well as the reporting of disposals of residential property to HMRC by UK residents. Particularly in the case of the latter, there does not seem to have been much action on the part of HMRC to make taxpayers aware of this change, despite the fact that penalties will be levied if the sale is not reported within the required time limits.
We have set out below a summary of the changes and will be happy to discuss these in more detail if you think they may be relevant to your tax position.
Main residence tax reliefs
Clients may recall that up until April 2014, the last 36 months of ownership of a property that had at any point been the owner’s main residence qualified as a deemed period of occupation and thus provided an exempt period for capital gains tax (“CGT”) purposes.
From April 2014 this exempt period was reduced to 18 months for the majority of taxpayers, with the 36 month period only remaining available to disabled persons or long-term residents of care homes.
Continuing their focus on private residence CGT reliefs, from 6 April 2020 this exempt period will be further restricted to the last 9 months of ownership. Again, the 36 months exemption will remain for disabled persons or long-term residents of care homes.
In addition, from April 2020 the lettings exemption – which previously has allowed up to £40,000 of gains relating to a let period of a main residence to be exempt from CGT – will only be available where both the owner of the property and the tenant have occupied the property at the same time. In the vast majority of cases, therefore, the lettings exemption will no longer apply.
These changes will significantly restrict the available exemptions for those selling a property that has, at some point, been their main or only residence.
As always, we will be happy to advise further on the available reliefs and potential CGT exposure should you be considering selling your residence.
Sales of UK residential property from April 2020
Up until April 2020, UK resident individuals, trustees and personal representatives disposing of UK residential property only needed to declare the disposal on the self assessment tax return after the end of the relevant tax year, with any CGT due payable on the following 31 January. In some cases, this meant the CGT did not have to be paid until nearly 22 months after the sale had taken place.
From 6 April 2020, any sales of UK residential property owned by a UK individual, trustee or executor, where contracts are exchanged on or after 6 April 2020, will fall into the new regime whereby, in most circumstances, any gain arising must be reported to HMRC, and an on-account CGT payment made, within 30 days of the sale completion date.
We will be happy to assist with completing and filing the CGT return; however, swift action is needed as HMRC advise that taxpayers will themselves first need to apply online for a CGT reference which we will then use to submit the CGT return.
If you are already registered with the HMRC online service (perhaps because you already submit your own self assessment tax returns), setting up a CGT account and obtaining a reference number should be fairly straightforward; however, if you are not already registered, then it may take a little longer.
We would therefore recommend that this reference be applied for as soon as you know the completion date of the sale (as this is one of the items of information needed to obtain the reference) so as to impact as little as possible on the tight 30-day time limit for submitting the return. We hope that HMRC may rethink the need for the taxpayer to apply for the CGT reference themselves (and, indeed, the various Professional Bodies, such as the ICAEW and CIOT) have made representations to HMRC about this) but, for now, this is the position.
What disposals do I need to report?
No return is required where:
- the gain arising is not chargeable to CGT (for example, it is fully covered by private residence relief, unused losses or the annual exemption); or
- it is a no gain/no loss disposal; or
- the sale results in a capital loss (although in some cases the taxpayer may wish to submit a return to claim this loss if, for example, there has been a previous UK residential property sale in the same tax year and a reclaim of some of the CGT paid is possible).
What if the property is or has been my main residence?
Where the property has been used as the taxpayer’s only or main residence throughout their ownership and the garden and grounds of the property do not extend to more than half a hectare (approximately 1.2 acres), it is likely that full private residence relief will be available on the gain.
However, where
- there have been periods of absence from the property; or
- another property has been owned or rented at the same time; or
- the garden and grounds of the property are more than half a hectare
It is possible that not all of the gain will be covered by private residence relief and this will need to be considered further.
We will be happy to advise you on whether any of the gain arising on your main residence will not be covered by private residence relief.
How do I calculate how much CGT to pay?
Note that the CGT payable is referred to by HMRC as “notionally payable” and is a payment on account towards CGT due for the tax year with, in most cases, the final calculation of the overall CGT liability dealt with via self assessment after the end of the tax year.
The taxpayer must make a “reasonable estimate” of the CGT due, which includes taking into account their estimated taxable income for the year as well as any UK residential property gains already made in the year that exceed the unused basic rate tax band. This will determine whether their on-account payment is at 18%, 28% or a combination of the two rates. Note that gains already made in the tax year that arise on other assets are ignored when calculating the notional CGT liability.
If the individual, trustees or executors have unrelieved capital losses available at the time of the chargeable disposal, they can offset these against the gain. Note, however, that losses arising after the sale (unless arising on the disposal of another UK residential property) can only be taken into account via the self assessment tax return after the end of the tax year. This may result in an unfair cash flow issue for some taxpayers. Similar issues will arise if the taxpayer’s estimate of their expected income is higher than their actual income for the year; they will have to wait until the self assessment tax return to claim any overpaid CGT.
Do I also need to complete a self assessment tax return?
Taxpayers who are already dealt with under the self assessment system will also need to declare the disposal(s) on their self assessment tax return with any on-account CGT payment being taken into account when calculating their overall tax liability for the year.
For those taxpayers not within the self assessment system, there is no requirement to register to complete a self assessment tax return if their only tax liability is in respect of the gain declared on the CGT return and if the on-account CGT paid equates to the actual CGT due for the year.
HMRC Enquiries & Discoveries
HMRC have broadly the same rights to enquire into a CGT return as they do for self assessment tax returns.
Where the taxpayer is also dealt with under self assessment, the enquiry time limit is the same for the CGT return as for the corresponding self assessment tax return.
For taxpayers not dealt with under self assessment, the enquiry window runs to the later of 12 months after the usual filing deadline for self assessment tax returns for that tax year or 12 months after the filing date for the CGT return.
How can Charter Tax help?
Charter Tax have been preparing and filing NRCGT Returns for our non-UK resident clients since April 2015 and are well placed to deal with the similar filing requirements for UK taxpayers needing to file CGT Returns from April 2020.
As a guide, in most cases we would expect to be able to carry out the work for £600 plus VAT following completion of our questionnaire. However if, following a review of the completed questionnaire, we consider that our fee is likely to be higher, we will let you know before we commence any work.
If you would like to find out more about how we can help, please do not hesitate to contact us on 020 7084 5771 or 01580 313108.
Disclaimer
The information provided by Charter Tax Consulting Limited is general in nature and does not constitute specific tax advice. Professional advice should be sought before deciding on a course of action, or refraining from a certain action, arising from the above information. Tax legislation changes regularly and the information contained herein is provided based on legislation as at April 2020.
Taxation planning concerns the application of complex statute and case law to future events. Accordingly, however expert the opinion given, it is always possible that the Courts will take a different view of the application of the law.
We undertake to apply reasonable care and skill in the provision of advice. We do not guarantee that tax planning steps will in all circumstances achieve a certain legal effect.
