The government has passed legislation which will have a major impact on the filing and payment obligations of UK resident taxpayers who sell UK residential property from 6 April 2020. This measure applies to individuals and trusts. The legislation applies to capital gains tax only and does not apply to UK resident companies (and from 6 April 2020, non-resident companies) which are subject to corporation tax on capital gains.
This change was initially proposed in 2015 in order to reduce the time between a gain arising on a residential property sale and the tax being paid (in order to bring it closer to the position for other taxes). The April 2020 changes represent an extension of provisions which have applied to the disposal of UK property by non-resident persons from 6 April 2019.
Disposals before 6 April 2020 (UK resident individuals and trusts)
Currently, a UK resident individual or trust disposing of UK property that results in a taxable gain is required to report that gain on their annual UK self-assessment tax return. The deadline for reporting the gain and paying the tax due is the 31 January following the year of the disposal.
Disposals from 6 April 2020 onwards (UK resident individuals and trusts)
From 6 April 2020, a UK resident individual or trust disposing of UK residential property will be required to file a “residential property return” within 30 days of the completion date of the aforementioned disposal. Penalties will apply if the return is filed late.
The vendor will be required to pay an estimate of the capital gains tax within 30 days of the completion date. This will be treated as a “payment on account” against their total income tax and CGT liability for that year when the annual self-assessment tax return is submitted.
The individual or trust will, therefore, be required to estimate how much tax is payable. This will depend on several factors which could result in a refund/additional liability being due when the annual self-assessment return is submitted. If additional tax is due when the annual return is filed, then interest will be payable at the standard rates set by HMRC.
Some common examples of where a return will not be required are:
- Where the gain is covered by principal private residence relief for the duration of the taxpayer’s ownership
- If a loss arises on the sale of the property
- The gain is sheltered by capital losses crystallised before the sale takes place
- The gain is small enough to be covered by the individual’s annual exemption for the year of disposal.
NB: The return and payment on account will not be required where the property disposed of is not residential property or where the property is situated outside the UK.
The above list is not exhaustive and, therefore, if you have any doubt over whether a return will need to be submitted please contact one of our team to discuss.
From a practical perspective, the taxpayer will need to rapidly determine whether (or to what extent) their gain is sheltered through principal private residence relief and, if it is not fully sheltered, what the gain will be and to what extent it will be sheltered by crystallised capital losses or their annual exemption. As these can take time to assess/calculate, it will often before worthwhile to start to assess them before the sale has completed.
Non-UK residents have already been required to file returns within 30 days when they have disposed of UK property, both residential and non-residential, since 6 April 2015 and 6 April 2019 respectively. There are no changes for disposals by non-UK resident individuals or trusts from 6 April 2020.
Action after 5 April 2020
The application of this legislation to UK residents will be a ‘game-changer’ in the sense that the tax filing and payment obligations need to be considered immediately on completion of the sale rather than left until after the end of the tax year.
It will be common for individuals to not know precisely what their CGT liability will be at the time of the sale and indeed, some of the relevant information may not be known until after the end of the tax year. For example, this could be the case where the tax liability depends on other disposals or other income in the same tax year. It would, therefore, be prudent to contact your tax advisor much sooner (ideally before completing the transaction) when making residential property disposals in order to submit the returns on time and to determine an appropriate estimate of the CGT liability.
Your usual BDO tax advisor would be pleased to have an initial conversation on this area should you have any further queries.