Tax Insider Tips: Time is not on your side
Lee Sharpe looks at government plans to significantly change how people report and pay capital gains tax on UK property sales.
There are to be some quite fundamental changes to the way that UK residents will be required to report and pay for capital gains on residential property. They are likely to prove most unwelcome. UK resident companies are not affected by these proposed changes, while non-residents already operate under a similar regime, which the government intends to align more closely with the new regime for UK residents.
Currently, a capital gain by UK resident individuals is reportable through the self-assessment tax return regime. This means that, if an individual disposes of a property anywhere between (say) 6 April 2018 and 5 April 2019, it will be notified on his or her 2018/19 tax return, which need not be submitted until 31 January 2020. The corresponding capital gains tax (CGT) is payable on the same day.
The current regime means that it can be anywhere between roughly ten and almost 22 months before the CGT is returned and settled. The regime works in a similar fashion for trusts and for partnerships.
The government intends to require UK residents, within 30 days of completing the disposal of a UK residential property:
- to prepare a provisional CGT return, and
- make a provisional payment on account of the CGT found ultimately to be due
This will be in addition to the existing CGT aspects of self-assessment. In other words, people will still have to fill in the CGT pages of their self-assessment tax returns and to pay any outstanding CGT by 31 January following the tax year in question. The new regime will apply for disposals made on or after 6 April 2020 – i.e. the 2020/21 tax year.
There is a very good reason for the apparent duplication – i.e. still having to keep the CGT pages of the self-assessment tax return. The reason is that, just as with income tax, CGT is assessed on an annual basis, and brings into account all of the gains and losses of a tax year. The rate of CGT applicable can depend on the total taxable income in the same tax year. In other words, the correct CGT position can be established only after the end of the tax year, and all transactions can be taken into consideration. The government nevertheless wants taxpayers to make an educated guess as to the CGT that will eventually be due, and pay it very quickly.
The government has said that people will no longer have to register for self-assessment only because of capital gains on residential properties covered by the new rules, but even if someone stays out of self-assessment, there will still need to be a facility for reconciling the interim calculation of the payment on account to the CGT that ultimately proves to be due – there will still need to be some form of end-of-year reconciliation exercise.
The estimated calculation
The government intends that the taxpayer should:
- estimate his or her income for the tax year, to work out roughly how much of the gain is taxable at 18% and how much is taxable at 28%;
- offset any capital losses brought forward or that have already arisen in the tax year prior to disposal; and
- ignore any gains made other than on residential property so far in the year, so that residential property gains can benefit from the annual CGT exemption and losses to date.
However, there is no facility to reduce CGT payments on account (i.e. to get some of the provisional CGT back) if the taxpayer subsequently makes a capital loss in the tax year. The only way that this might happen is if the taxpayer then makes a further residential property disposal in the same tax year, which is reportable under the proposed regime and is, therefore, able to apply losses arising between the previous reportable disposal(s) and the latest one.
There will be no need to make an on-account return where there is no CGT to pay, for example:
- where it is a ‘no-gain/no-loss’ transaction, such as between spouses and civil partners;
- where the gain is covered by private residence relief; or
- where any losses or annual exemption are sufficient to cover the gain.
While the regime will apply to UK residents disposing of property overseas, a non-UK disposal will be excepted if some or all of the gain qualifies for double taxation relief (broadly, where the gain is potentially taxable also in that other country and there is provision to mitigate the UK tax as a result). Similarly, where the gain is taxable on the remittance basis (so will be taxable in the UK basically only if the funds end up in the UK).
Practical considerations and problems
This is a very short reporting window. Taxpayers and their advisers may struggle to put together the history of original acquisition cost, enhancements, etc., particularly if the property has been held for many years. It is human nature to undertake such work only when the property is in the process of being sold, even if it may have been marketed for some time beforehand.
The reporting requirement is not affected by a lack of proceeds. A gift or sale at undervalue that triggers a taxable gain will also trigger a requirement to report. Many taxpayers do not appreciate that it is basically only gifts between spouses and civil partners that may be tax-free, and mistakenly believe that CGT does not apply to any gifts because there are no proceeds. While this problem would apply under self-assessment as well, it is arguable that there is far more chance of its coming to light in a reporting timeframe of up to 22 months, than in just 30 days.
Penalties will apply to late returns, and to late payment, under the new regime. These will be in addition to any penalties under the standard self-assessment regime.
While the consultation document talks about implications for owners of holiday and second homes, etc., this regime seems likely to fall most commonly on residential property landlords. Landlords and their advisers will need to get to grips with the regime in time for its introduction in 2020/21.
The government is clearly not too concerned about inconveniencing taxpayers here. In essence, this extra work is about getting the same money into the Exchequer, only more quickly – after all, it will be no more than the amount of CGT that would have ultimately been returned under self-assessment.
Since losses can be considered only when they have arisen before the residential property disposal, it would make sense in some cases to crystallise such losses earlier in the tax year and to make residential property disposals later. This assumes that the taxpayer has any control over when things are sold or disposed of. It also assumes that the gains or losses to be made are relatively fixed quantities – one might not want to sell quickly at a large loss if there’s a reasonable expectation that postponing the disposal might result in a much smaller loss.
The regime applies to persons tax resident in the UK that are subject to income tax, and a quite similar regime also applies to non-resident persons subject to income tax or corporation tax in the UK. The only entities that are currently excluded from the new regime are UK resident companies. It is strange how tax policy ostensibly attempts to discourage so-called ‘tax-motivated Incorporation’, yet in many areas appears quite happily to encourage it.
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