New rules for reporting gains on sale of second homes
From 6 April 2020, UK residents disposing of UK residential property will have new capital gains tax (CGT) reporting and payment obligations.
At the moment, any capital gains tax due on the disposal of any asset is collected by 31 January following the end of the tax year of disposal. For example a disposal in May 2017 crystallises a gain within the tax year to 5 April 2018. Tax on that gain is payable under Self Assessment by 31 January 2019, some 20 months after the disposal. HMRC would like to collect this tax a bit earlier.
New rules will therefore come into effect for disposals (including sales and gifts to family members or other connected parties) by individuals, trustees and executors. The general rule will be that within 30 days of the completion of a disposal of UK residential property, a return (‘residential property return’) must be submitted to HMRC reporting the gain and a payment on account of the tax due must be made.
Circumstances where the new rules do not apply
The reporting and payment requirements will not apply where:
no tax is due, for example if the gain on disposal is covered by principal private residence relief, the CGT annual exemption or losses incurred on or before the disposal;
the disposal is at no gain/no loss such as transfers between spouses;
the disposal is the grant of an arm’s length lease for no premium to a person unconnected with the grantor;
the disposal is by a UK registered charity;
the disposal is of a pension scheme investment.
What is to be paid?
The payment on account required is the amount of CGT notionally chargeable at the filing date. This is the tax that would be due if, under the normal rules for calculating chargeable gains for a tax year, the tax year ended at the time the disposal is completed. In calculating the amount, only residential property gains are taken into account, but any unused allowable losses for capital gains purposes incurred by the time the disposal is completed, can be used.
Available reliefs and the annual exempt amount are applied in the normal way. Anticipated gains and losses on future disposals are not be taken into account. The amount of CGT payable on account is the amount after applying the applicable rate of tax to the net gain, usually 18% or 28% at current rates.
Where there is more than one residential property disposal in the same tax year, the amount of CGT notionally chargeable must be calculated after each disposal.
Estimates and assumptions
The 30-day reporting and payment window will make it difficult for some people to provide exact figures. The Government accepts this, and the legislation allows for certain estimates and assumptions to be made.
Reasonable estimates can be made of an individual’s taxable income for the year, and of valuations and apportionments, where it is reasonable for the person to do so based on the circumstances and the person’s knowledge at the time.
A person will be able to correct an amount paid or payable on account when they have failed to take into account information available at the time the payment on account calculation was made. If the resulting amount is higher than the amount previously paid, the difference becomes payable to HMRC and interest may be due. If the amount is lower, the difference becomes repayable along with repayment interest from HMRC.
It is understood that if a payment on account proves to be insufficient, as long as at the time the residential property return was made reasonable estimates were used, there should be no interest charges. It will accordingly be important to keep good records and retain evidence of how any estimates are determined.
Individuals who are within self-assessment must report any residential property gain in their self-assessment returns as well as in a residential property return. The self-assessment return will then supersede the residential property return.
Amendments and enquiries
The general amendment rules for self-assessment returns apply to residential property returns, although amendments are only permitted so far as the return could have included the amendment by reference to things already done.
Where a person is not required to submit a self-assessment return, the residential property return can be amended within 12 months of the 31 January following the tax year in which the disposal was made.
Rules regarding enquiries, amendments of returns during enquiries, determinations by HMRC and discovery assessments apply in a similar way as for self-assessment returns.
April 2020 may seem a long time away, but property sales are often in the pipeline for some time and sellers need to be aware that the tax due is payable when the sale completes otherwise they risk being charged penalties and interest.
Disclaimer: The views and opinions expressed in this article site are solely those of the original authors and other contributors and do not purport to give specific legal advice. The information is current at time of writing but could be subject to change.