News from the Association of Taxation Technicians released in the last few days suggests that buy-to-let Landlords and those people who own second homes are now faced with a much shorter periods of time in which to pay any capital gains tax (also known as CGT) they owe on any property sales, from April 2020.
HMRC Raised concerns about CGT
At the moment, when CGT is due to be paid HMRC require a disposal to be reported as part of a self assessment tax return. Anyone who completes self assessment will be aware that CGT has to be paid by 31st January of the following year.
Under current legislation, this means that residential property owners are therefore allowed anywhere between ten and twenty two months after the sale of the property has been completed, before any liable tax needs to be paid.
HMRC raised concerns about the long length of time before CGT was due to be paid and the new rules, coming into force in just under two years require any individuals and trustees who are in the position of disposing of a residential property to make a payment of CGT within thirty days of the final completion of the property sale.
Current and new CGT rules explained
To explain this more fully, under current legislation if a property owner sold a property and exchanged contracts for a house on 25th April 2019 and the sale finally completed exactly one month later on 25th May 2019, the rules that are currently in place would mean that if there was any CGT, it would have to be paid no later than January 31st 2021.
Under the newer rules, if contracts were exchanged on 25th April 2020, with completion on 25th May 2020, CGT would be due by 24th June 2020. That equates to roughly seven months earlier than if the dwelling was sold in the previous tax year.
Sellers need to be aware and in charge of their money
The Association of Tax Technicians have stated that the new rules will reduce the amount of time that anyone selling a residential property have to pay their CGT. They went on to add that it was important sellers had all the requisite information to hand, including details of historic costs and dates of occupation for the property well in advance of the sale, to allow for smooth transition and accurate figures to be gathered.
There are additional complications for ‘in year’ reporting, because many people won’t be aware of the rate of tax due at the time of the sale. The tax rate for CGT depends on the individual’s income for the tax year and can really only ever be estimated at the time of the disposal of the property.
To add to the confusion further, individuals are allowed to make other disposals liable to CGT which could also affect the position. At the end of the tax year, individuals will therefore need to revise any computations they make.
A particular area of concern is the treatment of capital losses, says ATT. Under the current proposals, the taxpayer will only be able to take into account of losses which are known about at the time of disposal. If they incur more capital losses later in the same tax year, then it is likely that the original payment on account of CGT will be found to be too large.
However, they will not be able to reclaim any overpayment until after the tax year has finished. This could leave the taxpayer out of pocket for some months, warns ATT. The only time that capital losses realised after the disposal of the property can be taken into account is if the taxpayer disposes of further residential property in the same tax year.
The ATT have already stated that when there were similar ‘in year’ reporting rules for non-residents who were getting rid of UK properties, it created a whole host of issues when some individuals only realised they needed to report their disposals earlier on when they eventually came to complete their self assessment tax forms later in the year.
HMRC need to consider softer penalties
The ATT have also asked the HMRC to therefore consider a ‘soft landing’ for anyone incurring a penalty during the changeover and in the first period of the new rules.
It’s worth pointing out that people who are selling their only or main home, won’t be affected by this new ruling. However, this is only on the proviso that they are entitled to a full private residence relief which then exempts them from having to pay and CGT on a sale.