From 6 April 2020, UK resident taxpayers who dispose of UK residential property will be subject to new filing and payment obligations when they dispose of UK residential property.
Disposals before 6 April 2020
Prior to 6 April 2020, a UK resident individual (or trust) who disposed of a UK property and realised a gain was required to report that gain on their annual UK self-assessment tax return.
The deadline for reporting the gain and paying the tax due was the 31 January following the tax year of the disposal. For example, if you sold a property in October 2018, you would have until 31 January 2020 to report the gain realised and pay any tax due.
Disposals from 6 April 2020 onwards
From 6 April 2020, a UK resident individual (or trust) disposing of UK residential property will be required to file a ‘UK land return’ within 30 days of the completion date of the disposal.
They will also be required to pay an estimate of the capital gains tax due on any gain realised on the sale within 30 days from the completion date of the disposal. This will be treated as a “payment on account” against their total tax liability for that year, which is calculated when their annual self-assessment tax return is submitted by the usual 31 January deadline.
This change to reporting will require the taxpayer to estimate how much tax is payable within 30 days of the sale. Any underpayment of tax due will be subject to interest at the standard rates set by HMRC and any failure to report the gain will result in penalties.
Estimating the tax due will depend on several factors, and could be complicated to achieve in the timescale if, for example, the property was once the individual’s main home or has been subject to significant refurbishment.
Exceptions
There are some exceptions where a UK land return will not be required. For example:
- Where the gain is covered by principal private residence relief (PPR) throughout the duration of the taxpayer’s ownership;
- If a loss arises on the sale of the property;
- If the gain is sheltered by capital losses crystallised before the sale takes place; and
- If the gain is small enough to be covered by the individual’s annual capital gain tax exemption for the year of disposal.
From a practical perspective, the taxpayer will need to rapidly determine whether (or to what extent) their gain is sheltered through PPR relief and, if it is not fully sheltered, what the gain will be and to what extent it will be sheltered by crystallised capital losses or their annual exemption. These calculations can be complex and it may not be straightforward for taxpayers to establish whether they meet any of the above criteria without speaking to their tax advisor.
Penalties
Penalties for filing the UK land return start at £100 immediately. If the return is more than 6 months late a penalty equal to the higher of £300 or 5% of the tax due is payable. If more than 12 months late, a further penalty of either £300 or 5% of the tax will again be due. £10 daily penalties may also be levied for up to 90 days (between 3 months and 6 months of filing date). For larger transactions, the 10% penalty could be quite significant.
As with other penalties, a taxpayer may be able to appeal on the basis of having a reasonable excuse, but, as has been seen previously, HMRC can be resistant and taking appeals to the tax tribunals can be a lottery.
How can WLH Tax help
The application of this legislation to UK residents will be a ‘game-changer’ in the sense that the tax filing and payment obligations need to be considered immediately on completion of the sale rather than left until after the end of the tax year.
It will be common for individuals not to know precisely what their CGT liability will be at the time of the sale and indeed, some of the relevant information may not be known until after the end of the tax year. It would, therefore, be prudent to contact your tax adviser prior to the disposal taking place so that you are best placed to submit the returns on time and to determine an appropriate estimate of the tax due.