By Sheelagh Jenkins, Accountant at Hive Business
Landlords who are considering selling one or more of their rental properties need to be aware of an important change in Capital Gains Tax (CGT) rules which will soon come into force. Rules are already tighter for non-UK resident landlords, but the Government is now extending changes to UK landlords.
From 6 April 2020, CGT arising on the sale of residential property will be payable within 30 days of the completion date. This will be done by submitting an additional property disposal return and making a payment on account to HMRC.
This is a substantial change from the current situation, where the liability is declared through self-assessment tax returns and the tax falls due at the same time as the income tax arising in the year on 31 January.
For example, at present, if a landlord completes a rental property sale on 31 March 2019, the CGT arising on that sale is not payable until 31 January 2020 along with all other 2018/19 tax.
In a more extreme example, if a rental property sale completed on 30 April 2018, the CGT arising would still not be payable until 31 January 2020, as the gain also falls in the 2018/19 tax year.
This is potentially going to cause a number of issues:
- Who is going to complete the new property disposal return? Will solicitors be aware of the new requirements and be able to advise their clients appropriately?
- If the landlord selling the property is not aware of these new rules and/or does not consult an accountant promptly, the CGT is going to be late and penalties will be charged. The penalties will be £100 for a late return, followed by £10 per day for up to 90 days if it is more than 3 months late and then the greater of 5% of the unpaid tax or £300 if it is more than 6 months late. For example, if a sale completed on 30 April 2020, the CGT would become payable by 29 May 2020. If the accountant is not informed of the sale until work begins on the 2020/21 tax return, the CGT is likely to be more than 12 months late already.
- In addition, the CGT rate is based on total income for the year. Therefore, this will need to be estimated in order to calculate the CGT payable on account. If there is no gain to report or the gain is reduced to nil by exemptions or losses, the property disposal return will not need to be completed. This may also be hard to assess before the end of the tax year.
- If further assets are disposed of later in the same tax year, this can have a retroactive effect on the tax position of the original calculation, which of course has already been submitted to HMRC.
Once the self-assessment return for the tax year is submitted, the Capital Gains Tax already paid on account will be deducted from the total tax due, thereby correcting earlier overpayments (and underpayments).
Clearly good, and timely, communication with your accountant is vital in avoiding late payment penalties or over-paying.
If you would like more information about this issue, we can help.