Residential landlords to pay Capital Gains Tax earlier

Residential landlords to pay Capital Gains Tax earlier

Since April 2015, UK residential property disposals by non-resident persons (including trusts) have been taxable, with the gains needing to report online even if there is no tax to pay or there is a loss, and with the payment of any tax due to HMRC within 30 days, unless under the person is already under Self Assessment.

Government can clearly see the benefits to the public exchequer of advancing the payment date for Capital Gains Tax and so is now proposing that tax should be paid within 30 days of the date of completion for all residential landlords for sales (or gifts) from 6 April 2020.  As the gain on the sale of main residences is generally free from Capital Gains Tax, there will be no need for taxpayers to report these disposals (unless there were periods when main residence relief was unavailable).

This will be a major change for taxpayers, where for individuals, partnerships and trusts it has previously been possible to make a disposal shortly after 5 April and not pay the Capital Gains Tax under self-assessment for nearly 22 months, on the 31 January of the year following the tax year in which the disposal was made.  For example, Capital Gains Tax for a sale on 6 April 2018 would not be payable until 31 January 2020 (although the tax due for a sale on 5 April 2019 would also be 31 January 2020).

As well as a shorter payment period, the new rules will significantly reduce the time available to those selling residential property to calculate their Capital Gains Tax bill.  Such computations can be complex, so it will be important for sellers to assemble the details of historic costs, improvement costs and dates of occupation (if for example, main residence relief will be available for part of the period of ownership) well in advance of the sale.

The first consultation into this proposal ended on 6 June 2018 and HMRC will no doubt be trying to deal with the more complex issues arising, such as:

  • The rate of tax payable

Many individuals will not know what rate of tax will apply at the time of disposal. This is because the applicable tax rate (currently 18% or 28% for residential property) depends on the individual’s total income for the tax year, which can only be estimated at the time of disposal.

  • Offset of capital losses

The proposals will only allow the taxpayer to take into account losses which are known at the time of disposal.  If further capital losses arise later in the same tax year (other than further residential property disposals in the same tax year), then it is likely that the original payment on account of the Capital Gains Tax will be too large.

However, the taxpayer will not be able to reclaim any overpayment until their tax return is submitted after the tax year has finished, which could mean that the taxpayer has overpaid their tax for some months.

As the legislation is unlikely to be introduced before the Autumn 2019 Budget, there is likely to be a further consultation on these issues, but taxpayers need to be aware of the significantly compressed timetable for calculating the gains and paying the tax on residential property from 6 April 2020.

If you have any queries, please contact your usual consultant, Carlton Collister on 01993 886418 or carlton@landtax.co.uk.

June 2018