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CGT on property and the 30 day file and pay rule.

CGT on property and the 30 day file and pay rule.

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We have a client that has just completed on the sale of a residential buy to let, under the rules that I'd seen previously it was ok to report this on the self assessment tax return as long as this was in the 30 day period, looking at the HMRC site now it all points to following a real time pay and file route. Can we still use the tax return approach. Thanks

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By Matrix
07th Apr 2021 09:42

I wouldn’t expect the SA route to by outlined by HMRC. If you believe it complies with the law per other threads then do it.

Your client has to be pretty organised though. I can’t imagine getting all the rental income etc this month. Clients don’t necessarily have P60s yet assuming they are also employed.

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Replying to Matrix:
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By CW2012
07th Apr 2021 10:02

The timing will be a bit tight, they are retired and this was an accidental letting, it should be some rental income, pensions and the CGT.

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By Tax Dragon
07th Apr 2021 10:02

You don't sound sure about what the law says. Why risk it?

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By CW2012
07th Apr 2021 10:07

I am inclined then to go down the CGT report and file route, oddly the conveyancing solicitor said that they didn't deal with working out the CGT nor filing the resultant report. Is this normal behaviour, I'd have thought that the solicitors would have been happy to generate some additional income

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Replying to CW2012:
By ireallyshouldknowthisbut
07th Apr 2021 10:18

Why would a competent solicitor deal with CGT and more than a competent accountant deal with conveyancing?

CGT on residential dwellings is a hugely complex area with issues around capital work, issues around residence periods, ownership, all sorts of stuff that will jump up and bite the unwary. You also have to project clients income which is never an easy task, even for a basic PAYE client.

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By CW2012
07th Apr 2021 10:27

I take your point, then hopefully we will see some CGT pay and file work coming our way

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By Paul D Utherone
07th Apr 2021 10:38

If contract was before 6/4/2021, and you can get the SA return submitted before 30 days from completion, then the 30 day CGT return is not required (FA2019 Sch 2 para 5) & payment is deferred to 31 Jan 2022 (FA2019 Sch 2 para 6 because the 30 day return requirement is removed by para 5).

I would not expect HMRC systems to be so nuanced as to explain this.

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Replying to Paul D Utherone:
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By CW2012
07th Apr 2021 10:43

Thank you Paul, I will check as to whether we can meet that criteria, hopefully.

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By fawltybasil2575
07th Apr 2021 11:07

@ CW2012 (OP).

There have been previous threads on AWEB re this matter (in one of which I referred to the ability to postpone payment of the CGT by up to 9/10 months as a “loophole”, which I believe it is).

The views of AWEB members on previous threads are supported by the views of LITRG, here:-

https://www.litrg.org.uk/tax-guides/capital-gains-tax/capital-gains-tax-...

[Scroll down to “the paragraph starting “Such a return”).

Paul has kindly advised you of the legislation, which is here:-

https://www.legislation.gov.uk/ukpga/2019/1/schedule/2/enacted

Frankly, the decision as to whether advantage should be taken of the legislation is one not for YOU, but for your CLIENT, to take. Certainly, YOUR opting to submit the “30 day return”, without advising your client of the “pros and cons” , could leave you exposed to a negligence claim (since the client could, rightly, contend that your actions have resulted in his paying CGT 9/10 months earlier than he needed to, thus resulting in a loss of interest in that 9/10 months OR perhaps, albeit less likely, a greater loss from the lost opportunity to use the “CGT monies” elsewhere).

Whether you take advantage of the legislation or not, you should appraise your client of the pros and cons of submitting the 30 day return. If, say, he advises that he is unconcerned at having to pay the CGT 9/10 months earlier than he needs to, and therefore authorises you not to take advantage of the legislation, you have no problem.

If there is any element of doubt, however, in his mind, then (on the basis of the facts supplied by you) if you are confident that a valid 2020/21 Tax Return can be submitted promptly, then seek his confirmation that you should endeavour to submit it - in that regard, if it is necessary to enter any “provisional” figures on the 2020/21 Tax Return, then Box 20 on page TR8 enables you to do so (explanatory narrative in Box 19 should be added: the appropriate amended 2020/21 Tax Return can then be submitted later).

Basil.

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Replying to fawltybasil2575:
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By CW2012
07th Apr 2021 11:35

Thank you, I seem to recall Moira Stewart saying tax doesn't need to be taxing.

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By Tax Dragon
07th Apr 2021 12:05

A lot of nonsense gets posted in here. A fair bit of it by me, no doubt.

Thank you to Paul and Basil for singlehandedly (erm, doublehandedly, I suppose) restoring my faith to some extent that this forum can be really helpful. Two excellent answers - citing legislation and explaining the role of an advisor (and its limitations).

Btw, talking of nuances, Paul... what's the point of para5(2)? I'm not immediately seeing a circumstance in which it would apply.

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Replying to Tax Dragon:
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By richard thomas
07th Apr 2021 13:33

Unusually for this site I'm not a Paul, but as I have researched this area for previous questions on this topic I'm jumping in.

My only thought was that para 5(2) is to stop someone who takes advantage of para 5(1) then underreporting the tax on the disposal in their SA, however unlikely it is that someone would do that.

As usual these days the Explanatory Notes the Bill are totally useless.

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Replying to richard thomas:
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By Tax Dragon
07th Apr 2021 15:59

Thank you non-Paul. I hadn't thought of that scenario and, even now you have suggested it, I'm finding it hard to get my little head around. Though, far from being nuanced, it seems like a sledgehammer to crack a nut! (Also, if your suggestion is correct, it implies that the 'loophole', as Basil sees it, is entirely intentional, but opens the door to some wider mischief [that I am not seeing] that para5(2) then attempts to prevent.)

And are there unintended casualties from para5(2)? I don't have a better suggestion than yours, but it does seem (to me) an extraordinary situation and an extraordinary 'remedy'. The normal remedial step that someone who had underreported tax via SA would be required to take would be to correct the SA. You're suggesting that such a someone not only needs to do that (incurring whatever interest and penalties that may flow from so doing), but also to submit the 30-day return and pay the full amount of the tax within 30 days (or, more likely, not having done so, face possible interest and penalties for that failure).

But what if the underreporting were due to a minor careless error? Maybe one that the taxpayer dutifully corrects before the 31 January filing-and-payment date. Would that lead to para5(2) kicking in (and therefore a failure to make a 30-day return etc)?

Or what if there's a subsequent legitimate amendment (other than a correction), or a claim, or revocation of a claim? [Some claims and elections - eg averaging - increase in-year tax.] Conceivably (given the assumptions and estimates clauses), para5(2) opens the door for HMRC to argue that a Sch2 return was needed.

I may be way off beam here, but if so it's because I'm neither seeing the mischief nor understanding the remedy. And I am left wondering... loophole? Or trapdoor?

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Replying to Tax Dragon:
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By More unearned luck
07th Apr 2021 20:41

I don't think that an averaging claim would affect matters as the change in the year 1 liability 'relates' to the the later year; the year 1 assessment remains unaltered.

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Replying to Tax Dragon:
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By richard thomas
08th Apr 2021 11:48

I have thought more about paragraph 5(2) overnight, and necessarily paragraph 5 as a whole and its relationship with Schedule 2 (as you should not of course construe a single sub-paragraph outside its context).

I now agree with Fawltybasil (if I did not before) that paragraph 5(1) is properly characterised as a loophole, but in a specialised sense. I will explain why I think that.

A loophole in tax law is a metaphorical use of a term in medieval castle construction, the principal feature of which was its narrowness, simultaneously allowing an archer to fire off arrows through it, while being almost impossible to penetrate from the outside.

In tax law it means, as I understand it, that there is in a piece of legislation designed to achieve a policy end, normally to cure a mischief, but there is a way of being able to arrange one’s affairs so that the policy end is not achieved, usually because the legislator has not considered a particular case or there is a slip in the drafting.

The mischief for which Schedule 2 FA 2019 is a cure, as the government perceived it, is clear and can be seen in the 2018 Condoc. The government wished to get CGT in earlier than it otherwise would be collected through self-assessment. The Condoc makes the point that a gain may be made and the money obtained from sale between 9 and 22 months before it is due to be paid, and the Government wished to bring the payment as close as reasonably possible to a “real time” payment. Another important aspect of the policy was that it only applied to residential property gains, but the reasons for confining it to those gains are not relevant here.

The policy aim is achieved by paragraph 3 Schedule 2 FA 2019, requiring a return within 30 days of completion and paragraph 6, requiring payment of the notionally chargeable CGT within 30 days. That this a tax collection provision is shown by the exclusion from the obligation to make a return in paragraph 4, which provides that no return is required if there is no tax to pay.

There are a number of ways in which the obligations are made fairer than they might have been. The tax is due 30 days after completion, not contract (or date of gift), recognising that in most cases the money only changes hands on completion. That in itself offers opportunities to delay completion and hence paying the tax, but it would require complicity with the purchaser to achieve.

The calculation of the notional tax is not simply a matter of applying a tax rate to the amount of the gain. Some of the qualifications are practical, such as ignoring subsequent gains and losses on disposal of any assets even if you have a good idea that they will occur and how much they are (paragraph 7(2)(a)) and ignoring gains on assets other than residential property (paragraph 7(2)(b)). Paragraph 7(3) permits allowable losses on any assets to be taken into account if the contract date of their disposal falls on or before the completion date for the residential property in question. Paragraph 9 allows subsequent losses on residential property to be taken into account and a repayment claimed, but does not change the requirement for payment on the earlier return.

Other provisions ameliorating the tax are in paragraph 15, the overall effect of which is to allow the exempt amount to be applied to the gain (as other gains are ignored) and to allow likely reliefs to be taken into account.

This is the context in relation to which paragraph 5 falls to be construed. I had a sudden thought that paragraph 5 might only eliminate the requirement to make a return and not to that to pay the tax, but it is quite clear on a moment’s reflectio, that the obligation to pay is conditional upon a return being required (paragraph 6(1)).

And that is where the loophole is. Paragraph 5 allows no return and therefore no payment of tax if the narrow window set out in it allows the loosing off of tax free arrows. The narrow window opens, as has been discussed on this forum, if a tax return is delivered to HMRC within 30 days of completion. Completion may of course take place in the tax year after that of disposal so it is not necessarily a case of getting the return in the first few weeks of the year, although the later the completion date the smaller is the tax advantage of course.

Why did the government do that? There is no hint of the reason in the Condoc or the response document or in any HMRC publication or the Explanatory Notes to the Bill. As it was in the Bill as published there is nothing in the Committee stage debates about an amendment to insert it.

It is perfectly reasonable not to require a 30 day return if an SA return including the gain had already been delivered as there would be duplication to no purpose. But why did they not require the CGT to be paid nonetheless? That is a loophole but not of the traditional type because it was apparently intentional, unless the HMRC policy people responsible did not realise that is what they were doing when instructing the Office of Parliamentary Counsel, or did not realise that that was what counsel had offered HMRC in a draft.

This is the background to considering paragraph 5(2). It is a qualification of paragraph 5(1)’s use of the term “takes account of the disposal”. Normally a return would “take account” of a disposal if details of it were entered on the capital gains pages. “Take account of” would not in normal usage require the exact amount of CGT due on the disposal to be calculated.

But to be able to take advantage of the loophole the taxpayer has to make a self-assessment which assessed an amount of CGT which is no less than would have been reported under paragraph 6.

Note first that sub-paragraph (2) does not in terms say that the amount of CGT self-assessed is only the CGT on the disposal in question. Thus if a person has allowable losses on any assets, including residential property assets, whose contract date is after the completion date of the residential property gain in question, the result will be that the CGT in the return will be less than the CGT on the paragraph 6 basis and so the loophole is not open. It seems to me that paragraph 15 Schedule 2 does not help here unless the result of having the losses is to change to rate of tax in which case paragraph 15 can be invoked – see paragraph 15(1)(c).

I do not consider that paragraph 15(1)(b) applies because giving effect to allowable losses per se is not the giving of a relief (see sections 1(3) and 16(2A) TCGA).

Another possibility for where paragraph 5(2) may apply to block the loophole is the case where trading losses were established and included in the return under s 261B TCGA. I am very doubtful that paragraph 15 can apply to such an allowable loss as it is not a matter of conferring a relief, again unless it alters the tax rate.

This all assumes that a paragraph 15 disposal counts as a disposal for the purposes of paragraph 5(2).

The loophole is therefore likely mainly to be available to people for whom the residential property disposal is their only CG disposal of the tax year.

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Replying to richard thomas:
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By Tax Dragon
08th Apr 2021 12:59

Thanks, Richard, that's... actually, that's quite an awesome post. I think I'll stop worrying about para5(2). It sounds like I'll know it applies if it applies. But I can't see that happening in my life. Indeed, it's chances of ever applying seem like a tiny handful in a million, not worth (one person) worrying about. (A bit like the AZ blood clot thing. A matter for government to worry about, not you or I.)

Thank you for the etymology lesson. And I hope my silly little question didn't give you a sleepless night. (Just checking I spelt that right... no 'k', yes, correct.)

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Replying to richard thomas:
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By Catherine Newman
16th Apr 2021 15:24

Thank you for researching this Richard. I realise you have had past dealings with the Non-Resident CGT reports. I am trying (or more likely trying not to do one. Completion was on 29 March. I know the gain. Husband is definitely basic rate and the gain will be taxed at 18%. Wife is definitely a higher rate taxpayer. I am going to try and get the correct info before the thirty days are up. Would a provisional SA return using figures to get to the desired result be a return if the correct figures follow quickly if I fail to get the correct info in time?

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Replying to Catherine Newman:
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By richard thomas
16th Apr 2021 16:19

Both the paper CGT return and the electronic one have places for saying whether the information is provisional or estimated, like the SA return, so the answer to your question is "yes - it would be a return".

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Replying to richard thomas:
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By Catherine Newman
17th Apr 2021 09:12

Thank you very much Richard. That is music to my ears. I am a very happy bunny.

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By IslingtonAccountant
08th Apr 2021 12:21

For once we should give HMRC some credit.

I prepared a 30 day return this week for a disposal in the last week of March, and there was an extra question in the opening “check if you can use this service” section, “has your client sent a SA return for 2020/21”

The answer in my case was no, but presumably if the answer was yes the form’s response would be to say “do not use this service”

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By fawltybasil2575
17th Apr 2021 10:54

@ Catherine Newman.

Re your post yesterday at 15.24, I note your sentence:-

“Would a provisional SA return using figures to get to the desired result be a return IF THE CORRECT FIGURES FOLLOW QUICKLY (emphasis added) if I fail to get the correct info in time?”

Please forgive any perceived pedantry, but seemingly you consider that the clients have an obligation to (in practice you have an obligation to) submit an amended 2020/21 Tax Return “quickly” after the date of submission of the provisional Return. Unless you are entirely confident of being able to submit the amended Tax Returns (effectively showing “final” CGT figures) with accurate figures, I would opine that "quickness" should not be your priority, and that you should “take your time” over finalising the CGT calculations (and indeed in ensuring that the amended Tax Returns are 100% correct in all other respects).

It is of course possible to submit “amended”, and then later “further amended” Tax Returns, but this sends out the wrong message to HMRC.

My reason of course is that the clients have until 31 January 2023 (one year after the normal deadline of 31 January 2022 for submitting Tax Returns) for submitting AMENDED Returns.

That said, presumably you will be able to submit the amended Returns by 31 January 2022; and certainly this is advisable in view of the danger of Interest being payable if the correct 2020/21 IT/CGT liability is not paid by 31 January 2022 (with a potential exposure to Penalties if HMRC were able to contend successfully that negligence arose from the submissions).

It is of course recommended that one indicate, in the relevant “white space”, on the provisional Tax Returns, the expected date for submission of the amended Returns – in your case I would recommend your indicating dates which give you ample time to “nail” the CGT Computations.

In short, as mentioned above, “take your time”.

Basil.

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