Major change: CGT on residential property sales

There were many changes with capital gains tax in the past few years but most changes only applied to non-resident landlords.

From 6 April 2020, when CGT is due on the disposal of residential property a return must be filed and "notional CGT" paid within 30 days of completion. This is a major change!

The changes

A number of fundamental changes in relation to capital gains tax are anticipated with effect from 6 April 2020 including:

• Reduction in final period exemption from 18 to 9 months
• Restriction of letting relief to periods of co-occupation between tenant and landlord
• Extension of PPR relief for certain inter-spouse transfers
• Reduced deadline for reporting capital gains and paying capital gains tax on sales of residential property

This article concerns the last of these changes.

What is the current position ?

Property owners will be used to having a minimum of 10 months and a maximum of 22 months between incurring a capital gain on the sale of a residential property and reporting the disposal to HMRC and paying the tax. This has been the case since self-assessment was introduced in 1997.

With effect from 6 April 2020, the deadline is shortened to just 30 days, which brings the regime into line with the deadlines which were introduced for non-residents selling residential property after 6 April 2015, and both residential and commercial property after 6 April 2019.

Who does this affect ?

The new rules affect UK resident individuals, trustees and personal representatives who sell or otherwise dispose of residential property. This article concentrates on disposals by individuals. The rules do not extend to disposals by limited companies.

What is residential property ?

In most cases it will be clear that the property being disposed of is residential property. Where a property has both commercial and residential aspects, the gain arising must be apportioned on a just and reasonable basis, and only the residential part will be subject to the new reporting requirements.

The wider definition is taken from existing rules in place for disposals of UK residential property by non UK resident taxpayers. This includes land and property which has at any time in the period of ownership consisted of or included a dwelling. Off-plan purchases will also be caught as can the grant of an option to sell an interest in land or property.

What is the relevant date under the new regime ?

The date of exchange of contacts for a sale of residential property remains as the tax point for capital gains tax purposes, however it is the date of completion which is relevant in determining the 30 day deadline for the purposes of the CGT return required under the new regime.

This raises the question for sales where the date of exchange of contracts is before 6 April 2020, however the date of completion is after 5 April 2020. In this case, the return will only need to be reported under self-assessment for the 2019/20 tax year.

Uncommonly, you might find that the date of completion for a residential property sale may occur after the deadline for the submission of a self-assessment return, in which case no 30 day return will be required under the new regime.

What if the gain is covered by a relief ?

If the gain arising is fully covered by the annual exemption and other reliefs, then there is no requirement to make a return under the new regime.

Providing the conditions for the relief are met at the time of the claim for the relief, then the relief can be taken into account in the capital gains tax calculation for the purposes of the 30 day return. It is not sufficient to just have an intention to make a claim for relief dependent on future expenditure, for example an EIS subscription.

What if losses have arisen on this or other disposals ?

Contention exists in relation to the new rules where losses arise on the sale of residential property and other assets. The rules are set to be introduced so that:

• Any losses brought forward from a previous tax year, or arising in the current year prior to a residential property sale will be available to set against gains from that sale
• A loss on residential property does not need to be reported, however if a previous residential property gain has arisen, then a subsequent loss can be reported under the new regime in order to generate a repayment of tax from the earlier disposal
• A loss arising on the sale of any other asset after a residential property gain will not be available to offset against that gain until such time as the subsequent self-assessment has been completed.

Does the timing of disposals need to be considered ?

The complications which can be caused by losses arising on residential and other disposals during the same tax year mean consideration will need to be given to timing of disposals to ease cash-flow.

In most cases, there will be limited opportunities to change the timing of completion of a residential property sale, however where possible, non residential property sales at a loss can be made before the sale of residential property at a gain to ensure those losses are available for relief against that gain.

The availability of a repayment supplement in respect of tax paid under the new regime which is subsequently found not to be due as a result of the above is unlikely to mitigate the frustrations of taxpayers who are owed tax by HMRC which they are unable to access.

It is worth mentioning the residential property sales which complete on the same day will only require one return.

What happens if the CGT rate at the time of disposal is not known ?

Under the new regime, the rules require the taxpayer to estimate the tax liability based on anticipated levels of income for the year. If the taxpayer anticipates paying higher rate tax on their income for a tax year during which they dispose of a property, the CGT rate will be 28%. However, if their circumstances change abruptly after a disposal, so that they no longer anticipate paying higher rate tax, they will need to wait until after they have submitted their self-assessment return to claim back any overpaid CGT.

What is the format of the return ?

At the time of writing, we do not know what the CGT return under the new regime will look like. It is anticipated that the return will be in much the same format as the returns currently required for non-resident CGT returns and real time CGT returns which are currently available for completion by individual taxpayers.

Does the new return replace the self-assessment return ?

Where a return has been submitted under the new regime, there is still a requirement for the taxpayer to submit a self-assessment tax return within the normal deadline. The tax paid during the year, under the new regime is treated as “notional tax” by HMRC and will be taken as a credit towards the ultimate CGT liability arising as a result of the self-assessment return.