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 (CGT) only and does not apply to companies.
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. 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 2015.
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 (if you are not within self-assessment you are be required to register by 6 October).
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 ‘UK land return’ within 30 days of the completion date of the aforementioned disposal. Where properties are held jointly or in partnership, each owner is required to submit a UK Land return (and pay the tax) in respect of their share of the disposal. Penalties will apply if the return is filed late.
The vendor will also be required to pay an estimate of the CGT 30 days from 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 UK land return will not be required are:
- Where the gain is covered by principal private residence relief (‘PPR’) throughout 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.
In practice, a UK land return will be required for let properties, second/holiday homes and homes with extensive grounds and gardens not fully covered by PPR, in so far as such disposals crystallise a CGT liability.
Note: 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 PPR 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. These calculations can be complex and in some cases even require valuations be obtained. Taxpayers may, therefore, be advised to contact their tax advisers as soon as they decide to put their UK residential property on the market.
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. Note: fewer exceptions exist for Non-Resident CGT returns, which are still required even where there is no NRCGT payable.
Non-resident companies were within NRCGT for disposals of UK residential property before 6 April 2019, but are now within corporation tax and no longer subject to the reporting obligations described herein.
Currently the NRCGT returns must be submitted through the HMRC website. HMRC has stated that it is developing a new process for the UK land returns; it is expected to be similarly accessed through the HMRC website.
Penalties for filing the UK land return start at £100 immediately. If the return is more than 6 months late a penalty equal to the higher of £300 or 5% of the tax due is payable. If more than 12 months late, a further penalty of either £300 or 5% of the tax will again be due. £10 daily penalties may also be levied for up to 90 days (between 3 months and 6 months of filing date), but by concession HMRC has stated that it will not usually charge these. For larger transactions, the 10% penalty could be quite significant.
As with other penalties, a taxpayer may be able to appeal on the basis of having a reasonable excuse, but, as has been seen with Non-resident CGT returns, HMRC can be resistant and taking appeals to the tax tribunals can be a lottery.
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 not to 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 adviser much sooner (ideally when the property is first put on the market) 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 adviser would be pleased to have an initial conversation on this area should you have any further queries.