HM Revenue & Customs are set to introduce changes to the taxation and reporting of residential property sales by individuals and trusts, with effect from 6th April 2020.
Currently, when a tax liability arises on the sale of a residential property owned by a UK resident individual, the tax is calculated via a self-assessment tax return. The appropriate tax is calculated and paid by the 31st of January following the end of the tax year in which the disposal is made. Therefore in some circumstances, an individual will have 21 months to pay the tax due on the sale.
From 6th April 2020, such disposals will need to be reported and a payment on account in respect of the Capital Gains Tax (CGT) made within 30 days of disposal.
The calculation of the tax will not need to be exact, especially as the rates of CGT are dependent on an individual's income levels, and therefore an income estimate for the tax year will need to be considered at the time. The calculation will also need to take into account any available reliefs, exemptions and losses. A balancing payment or repayment will be dealt with after the end of the tax year, either by amending the CGT return, awaiting a reconciliation calculation from HMRC, or by including the gain on the self-assessment tax return.
An exemption to the filing requirement applies for any disposals made where gains are covered by principal private residence (PPR) relief, losses brought forward, or the annual exemption.
Failure to submit the return within 30 days of disposal will lead to late filing penalties, which are likely to be in line with self-assessment penalties (£100 for one day late, a further £300 for being six months late, and another £300 for being 12 months late). HM Revenue & Customs also have discretion to apply £10 daily penalties for returns filed between three and six months late.
It's currently unclear how the late payment penalties will apply, given that the payment on account that's made is an estimate.
To calculate the gain or loss arising and make the appropriate return to HMRC, it will be necessary to investigate the property's purchase history to identify the allowable costs and reliefs available. Taxpayers should therefore review the position as soon as they begin to consider disposing of a property and where appropriate, discuss this with their accountant or advisors.
HMRC have confirmed that a Residential Property CGT return may be made in place of a self-assessment tax return, and therefore an individual will not be required to register for, and to submit a tax return solely to report the disposal.
Please note, there are also significant changes to both PPR Relief and Lettings Relief from 6th April 2020, meaning a disposal after this date could significantly increase the tax due if any properties have previously been a landlord's main residence. Further guidance is available in our separate briefing which can be found here.
If you would like more information about how this might affect you, speak to one of our experts today.