Over recent years, law firms have faced increasing challenges caused by changes to tax legislation particularly in relation to Stamp Duty Land Tax (SDLT) and the complex rules which now apply to many purchases of properties.
There is now a further change which will affect law firms from April 2020. This change will place increased pressure on law firms which deal with residential conveyancing to help determine with their client (and their client’s tax adviser) the Capital Gains Tax (CGT) liability arising on the sale of residential property.
The change will introduce a new payment on account system which is aligned to the timing of the transaction. This system will require a UK resident individual who sells/gives away a residential property to make a payment on account to HMRC within 30 days of the transaction (the transaction date will be the completion of the sale/gift). To evidence the basis of calculation of this payment, a “payment on account” return will also need to be submitted to HMRC within this 30 day time period. This differs significantly from the current tax regime which only requires CGT and a return to be submitted by the 31 January following the tax year of the sale/gift.
The payment on account made to HMRC will be an estimation of the CGT liability that is due. In calculating the gain the following are applied in the normal way:
- Any unused losses
- Available reliefs
- Annual exemption
The disposal will also need to be reported on the personal tax return covering the tax year of the disposal so that the tax can be calculated correctly and then the payment on account will be deducted accordingly.
To the extent that the payment on account resulted in an overpayment of tax, this tax will be refunded to the client following the submission of his or her personal tax return.
The new regime will also extend to UK residents who sell foreign properties. In these circumstances, the payment on account will also be required unless:
- the gains are taxed in another country and Treaty relief is available against the UK tax
- gains are taxed on the remittance basis
No return is required where no amount is payable on account (if for example the capital gains on disposal being covered by private residence relief or a loss is created).
There is of course a tax payment system already in operation for non UK residents who sell residential property.
What do the changes mean for law firms?
There will be a need for law firms to highlight the new payment on account system to their clients when entering into transactions due to the short timescale in which payments will need to be made to HMRC. Law firms will also need to liaise closely with their client’s tax advisers to ensure that all appropriate information is relayed to the tax adviser in good time to ensure that a return can be made to HMRC within the required timescale. To the extent that a client does not have a tax adviser, the onus will inevitably fall upon law firms to address this issue and to ensure that their client has the required support and assistance.
How can sbtax+ help?
We provide a tax support service specifically tailored to law firms to ensure that law firms and their clients are able to access timely and property focussed tax advice during the course of a transaction.