Getting up to speed with the new Capital Gains Tax rules
From 6th April 2020 new rules come into effect which will mark a significant change in the way Capital Gains Tax is administered on the sale or gifting of a residential property.
Under the present system, CGT is declared through self-assessment tax returns and payable by 31st January following the year in which the tax gain arises, meaning that the liability is normally settled between 12 and 24 months after disposal.
CGT does not apply to properties designated by homeowners as their Principal Private Residence and grounds of up to 0.5ha (or larger if a case can be made for ‘reasonable enjoyment’ of the property) are included within Principal Private Residence Relief. However, second homes, investment property and buildings such as commercial workshops, holiday cottages or land such as grazing pasture, fall outside this exemption and are therefore liable for CGT.
The introduction of the new CGT rules on 6th April 2020 will mean that where there is a disposal of a residential property on or after that date, a CGT return must be filed with HMRC within 30 days of the sale, gift or disposal completing and a payment made on account in respect of any tax liability incurred. The new rules cover properties disposed of by individuals, non-resident individuals and companies.
The new system will bring the payment of CGT into line with other taxes such as PAYE and will also address problems caused in the event that a taxpayer either forgets to pay or does not have sufficient funds remaining from the disposal to settle the tax charge.
The new 30-day reporting and payment window will have greatest impact on those looking to sell second homes or residential properties, but do not apply where a gain is not currently chargeable for CGT, such as where a gain is covered by Private Residence Relief.
The new rules governing reporting and payment requirements will also not apply to the following:
- Disposals where there is either no gain or loss;
- Disposals which are the grant of an arm’s length lease for no premium to a person unconnected with the grantor;
- Disposals by charities;
- Disposals of any pension scheme investments.
In addition to these exemptions, the rules will only apply to residential property gains which have accrued on the disposal. Where gains are covered by Private Residence Relief, losses incurred on or before the disposal or the CGT annual exempt amount, no return or payment is required.
Where two or more disposals are made on the same day, only one return needs to be submitted, and if the seller has already submitted or is due to submit a self-assessment return which takes into account the disposal prior to the 30-day deadline, a separate return does not need to be filed with HMRC.
Payments and Calculations
Payments on account are calculated by determining 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. Only residential property gains are used when calculating this amount, but it is also possible to take into account any unused allowable losses for capital gains purposes incurred by the time the disposal is completed when making this calculation. Available reliefs and the annual exempt amount are applied in the normal way, but it is not possible to take into account anticipated gains or losses.
The amount of CGT payable on account is the amount after applying the applicable rate of tax to the net gain.
Estimates and Assumptions
The Government accepts that the 30-day rule may make it difficult for some people to provide exact figures. It therefore allows for certain estimates and assumptions to be made when completing the return, such as an individual’s predicted taxable income, when determining whether a disposal will be subject to the 30-day return and payment on account rules.
It will, however, be possible to provide correct figures which were previously estimated once they are known. If, once these correct figures are submitted the actual tax liability is higher than the amount paid on account, the difference becomes payable to HMRC and interest may also be due. Interest should not be charged if reasonable estimates were made when submitting the original return. If the amount is lower than that paid on account, the difference plus interest is refunded by HMRC.
David Ward, Partner at Fenn Wright, said “The new CGT rules will clearly have a significant impact for property owners. They can be complex, but with 9 months until they come into effect, there is plenty of time to get up to speed with the new rules. Preparedness and careful record keeping will be of the utmost importance as penalties and interest will be charged in the case of late filing or failure to pay within the allotted 30 days. You will need to act promptly and make sure valuations are in place.”
If you need specialist valuation advice, get in touch with our Survey team who will be happy to help.