Selling UK Residential Property – Do you know the new rules?

On 6 April 2020, some important changes came into effect which impact on how disposals of UK residential property are taxed and reported to HMRC. In light of these changes, it is essential that you keep your tax manager informed of any residential property disposals which you make in the future, because in many instances, the deadline for settling any associated capital gains tax (CGT) liability and reporting the disposal to HMRC will be accelerated. It is no longer appropriate to simply send details of your residential property disposals to your tax manager at the same time as you send in your year-end tax return information.

Reporting and payment

Under the new rules, taxpayers who realise a capital gain on the disposal of UK residential property will need to prepare and file a special online return to HMRC within 30 days of completion if it is determined at that point that a tax payment is due. They will also be required to settle the tax which is calculated to be payable by the same date. This brings forward the reporting and payment deadlines significantly, in some cases by almost 21 months.

Example

The disposal of a residential property which gives rise to a capital gain on 6 April 2019 (i.e. during the 2019/20 tax year and before the new rules came into effect), would only need to be reported via the Self-Assessment tax return, the deadline for submission of which is 31 January 2021, a little under 22 months after the disposal date. Any associated capital gains tax liability would be due for payment on the same date.

Conversely, the disposal of a residential property on 6 April 2020 (i.e. during the 2020/21 tax year and subsequent to the new rules coming into effect), would need to be reported within 30 days of completion and any associated capital gains tax liability would be due for payment on the same date. The disposal will also need to be reported on the Self-Assessment tax return.

It should be noted that:

• The date on which contracts are exchanged is relevant in determining the ‘disposal date’ for capital gains tax purposes.

• The date of completion is relevant in determining the point from which you have 30 days to make your online report and settle the tax which is payable.

A disposal includes gifts, although transfers or gifts between spouses are specifically excluded from the new rules.

The calculation which is prepared at the time of disposal is essentially an estimate of the taxpayer’s ultimate CGT liability, in respect of which a payment on account is then made. This payment will be used to offset the ultimate CGT liability for the year which will be determined when the Self-Assessment tax return is prepared.

All of the usual reliefs and exemptions (e.g. private residence relief, the annual exemption, unused capital losses, including those which have arisen earlier in the same tax year etc.) may be taken into account at the point of calculation.

Penalties for non-compliance

HMRC have announced that they will not charge any penalties for returns received late up to and including 31 July 2020. For UK residents, this means that transactions completed between 6 April and 30 June 2020 and reported up to 31 July 2020 will not be subject to a penalty. Therefore, if you have sold a property and realised a capital gain in the period since 6 April 2020, and not yet reported it to HMRC, please contact your tax manager without delay so that they can prepare the required calculations and report the gain to HMRC so as to ensure that no penalties are charged.

Transactions completed from 1 July 2020 onwards will be subject to a late filing penalty if they are not reported within 30 calendar days. The level of the penalty charged will be dependent on the length of the delay in submitting the return. In summary, if you miss the deadline by:

• Up to 6 months, you will get a penalty of £100.

• More than 6 months, a further penalty of £300 or 5% of any tax due, whichever is greater.

• More than 12 months, a further penalty of £300 or 5% of any tax due, whichever is greater.

Restrictions to private residence relief (PRR)

In addition to the changes outlined above which bring forward the date for reporting and paying tax where a capital gain is realised on the disposal of UK residential property, 6 April 2020 also saw the introduction of restrictions to existing reliefs which are available on the disposal of a taxpayer’s main residence.

Final period exemption

When a taxpayer sells a property that at some point has been their only or main residence, the final period exemption permits the element of any capital gain which is attributable to the ‘final period’ to qualify for PRR, regardless of the property’s use during that period. From 6 April 2020, the period of ownership which is deemed to be the final period for these purposes was reduced from 18 months to 9 months.

Lettings relief

Prior to 6 April 2020, lettings relief could be used to reduce the CGT payable on the sale of a property which at some point had been the taxpayer’s only or main residence, if it had also been let as residential accommodation. This relief could be used to exempt up to £40,000 of capital gains (£80,000 for married couples or civil partners owning property jointly) from any charge to CGT.

From 6 April 2020, the taxpayer will need to have been in shared occupancy with the tenant to benefit from lettings relief, effectively extinguishing any benefit of this relief for the majority of taxpayers.