Capital Gains Tax – a reminder of the rules

It is now three years since the introduction of strict new rules for the prompt disclosure of UK residential property disposals by UK residents. Paul Harris, Private Client Tax Partner takes stock and provides some useful pointers.

Since 6 April 2020, UK tax residents disposing of UK residential property have had to file a special Capital Gains Tax (CGT) return and pay any tax due within a very short period after completion, or risk incurring interest and penalties.

Despite all the current economic and political turbulence and uncertainty, there are still plenty of residential property sales going through which fall within the scope of these rules. With average UK house prices having doubled over the past twenty years, and a top CGT rate of 28%, the potential sums involved can be little short of eye watering.

Initially the time limit for filing the return and paying the tax was just 30 days, and while this has since been extended to 60 days, the time soon flies by – especially in the aftermath of a sale, when your mind will be on other things.

The situation is not helped by the complexity of the tax rules; the ‘clunkiness’ of the digital reporting system; short staffing at HMRC, and a general lack of awareness on the part of the taxpaying public. Although HMRC took a lenient approach in the early days, the gloves are now most definitely off when it comes to penalties for late filing.

The rules catch a wide variety of properties, including buy-to-lets and second/holiday homes, and they apply not only to individuals but also to trustees, executors, and partners in partnerships.

Points to remember

• If you do need to file a 60-day CGT return, please start gathering information immediately – especially if the property has a complex history of occupation and/or improvements, or if there is a risk of records going astray while moving house. Let your Tax Adviser know of your plans straight away.
• Private Residence Relief will not automatically cover more than half a hectare of garden and grounds. If therefore you are selling a substantial property, an early meeting with your Estate Agent and Tax Adviser should help to maximise your claim for relief and lay the groundwork for dealing with any challenge from HMRC.
• HMRC may seek penalties if you do not take proper care to submit an accurate CGT return. If the tax calculation includes valuations – where the property was owned on 31 March 1982, for example, or where it is necessary to allocate the sale proceeds between those parts that qualify for Private Residence Relief and those that do not – then I strongly recommend that a professional valuation is obtained.
• Except in the case of gifts (see below) or where substantial secured debt needs to be repaid, cash flow should not normally be a problem because the CGT is only payable once the completion monies have been received. That said, the tax can be substantial – especially on properties which have been held for many years – and so the sooner you have a clear idea of the amount due, the better.
• Most gifts are taxed as if they were sales at market value, so do make sure that you have sufficient funds set aside to settle the tax in good time.
• If your property meets the conditions for treatment as a Furnished Holiday Letting, then you could benefit from certain CGT advantages such as a reduced 10% tax rate and the ability to defer CGT by reinvesting the proceeds into new qualifying assets.
• When calculating your 60-day CGT payment, you can offset any capital losses on disposals which took place earlier in the same tax year, but not capital losses realised later in the year. It, therefore, makes sense to look for opportunities to crystallise losses before exchanging contracts for the property sale.
• If you struggle with the online submissions then it is possible to file a paper return, but you should allow plenty of extra time to complete the process. It will also take HMRC more time to respond to the filing and ultimately to finalise your position.
• There is no need to file a return where no tax is payable – for example if the gain is covered by Private Residence Relief, or if a loss arises. That said, it may make sense to file a return in order to ‘bank’ the loss for relief against future gains.
• Filing a 60-day CGT return does not necessarily eliminate the obligation to file a normal self-assessment tax return after the end of the tax year. Indeed, filing a normal return will reveal whether the original CGT payment was under or overestimated.
• There is a separate regime for non-residents, which also extends to commercial property. Unlike UK tax residents, non-residents must file a 60-day CGT return even if there is no tax to pay and/or a loss arises.

Three years in, HMRC may feel entitled to assume that every UK taxpayer has had ample time to understand and meet their obligations under the 60-day CGT reporting regime. In my experience, this is very much not the case, and even for the well-informed taxpayer pitfalls abound, and opportunities for tax mitigation may be missed. Anyone planning to sell or gift a residential property should speak to their advisers sooner rather than later.