Second homeowners and property investors who dispose of a property after 6 April 2020 face a tough new Capital Gains Tax (CGT) payment regime. The new rules will leave just 30 days to settle any tax due instead of up two 22 months under the current regime.
The changes were first proposed by the Government in 2015 but delayed following concerns that the they were little understood and that property owners were not yet ready.
Under the current regime, an individual or trust is required report any gain on the sale of property in an annual self-assessment tax return, with the deadline to settle any tax due by the 31 January of the following year. The date at which the capital gain is calculated is the date the contract becomes contractual, usually the exchange of contracts.
From 6 April 2020, any individual or trust disposing a property will be required to calculate the tax to be paid, to report any gain, and pay all tax within 30 days of completion.
To prevent confusion, HMRC has confirmed that where contracts are exchanged under an unconditional contract in the tax year 2019/20 (6 April 2019 to 5 April 2020) but completion takes place on or after 6 April 2020 the 30 days filing requirement does not apply. The gain should be reported in the 2019/20 self-assessment return in the usual way. This clarifies that the new reporting and payment regime applies only to taxable gains accruing on disposals of UK residential property made on or after 6 April 2020 (in the tax year 2020/21).
Late filing of CGT returns will leave individuals and trusts facing an immediate £100 fine with an additional penalty of the higher of £300 or 5% of the tax due if more than six months late. A further penalty of the higher of £300 or 5% of the tax due is payable if more than 12 months late, with HMRC reserving the right to charge £10 a day up to £900 for the period between three to six months of failing to file a return.
Individuals are taxed on gains in excess of their annual exemption at 18% if the taxable gain on residential property falls entirely within their basic rate band. Any part of the gain that exceeds their basic rate band will be taxed at 28%.
Trustees pay tax at 28% on taxable gains in excess of any unused annual exemption, on gains arising residential property held within a trust.
There are some notable exceptions to the regime, the most valuable being principal private residence relief (PPR). PPR is only be applied if the property sold is an individual’s principal home. It is available if an individual has lived in the home for the duration of ownership, that parts of it are not let out (although a single lodger is permitted), and that it is not used for business.
The changes do not impact non-UK residents who have for some time had to report and settle any capital gain within 30 days.
Calculating the CGT payable is not always straightforward, meaning it will be all too easy to inadvertently miss the 30-day deadline.
Hillier Hopkins recommends that any individual or trust wishing to dispose of a property talk to one of its specialist tax advisers early on in a transaction to establish the amount of gain to be made and the CGT liability to be paid to ensure payment can be made promptly and no unnecessary penalties incurred.