From 6 April 2020, there will be a significant change to the way capital gains tax (CGT) on UK residential property sales is reported and paid. It is important that you are aware of the new rules and what you can do to prepare for their introduction.
The change is unlikely to affect someone who sells their only home in which they have lived continuously throughout the time they have owned it because the capital gain in these circumstances is likely to be covered by “private residence relief”. However, anyone who disposes of a property which they have never occupied or which they have not occupied continuously (such as a buy-to-let property, an inherited property or a holiday home) needs to be aware of the new obligations they will face.
What are the new rules?
From 6 April 2020, where CGT is due on a residential property disposal (for example a sale, gift or other transfer or ownership), made by an individual or a trustee:
- within 30 days of completion of sale, a return will have to be submitted to HMRC by each joint owner
- the return must include a reasonable estimate of the CGT payable on the disposal; and
- the estimated CGT must be paid to HMRC within 30 days of the date of completion
Effectively, the seller/donor/transferor (for simplicity we will refer simply to the seller in the rest of this article) will be required to make payment of their CGT liability within 30 days of disposal. If the seller is required to complete a self-assessment tax return, the details of the sale will be repeated on the tax return and any CGT paid on account will be deducted from the final overall tax liability.
There are a number of exceptions to the requirement to file a CGT return and pay CGT on account; for example, no return is required when the gain is fully covered by private residence relief and/or the annual CGT exemption (currently £12,000 per individual) and/or by capital losses brought forward from an earlier period.
Given the tiered way in which CGT rates apply, the calculation of CGT will involve estimating the seller’s total income for the tax year in which the sale takes place.
How will the reporting process work in practice?
The seller will have to set up an online CGT account with HMRC to report the relevant figures; if they require a professional agent to assist with completion of the return, there will be a facility for authorising an agent to access the account. The seller will also use the online CGT account to pay the tax due.
How can you prepare for the new regime?
Clearly, there is a lot to do in 30 days so the sooner the process is started in anticipation of a sale the better. In particular, the seller will need to gather together a lot of information about the original cost of the property and its subsequent history. We have devised a checklist which is available on our website to assist with this. We recommend that this process is started as soon as possible rather than being left until the 30 day window.
If you are a professional adviser assisting clients with property transactions, you need to make those clients aware of the new rules as soon as a property disposal is on the horizon. If they do not feel able to complete the return themselves and do not have an existing adviser who can assist with this, we may be able to help so please get in touch to discuss this with us.