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Residential Property CGT On Sale – Changes ExplainedWritten on March 16, 2020 by Kirk Rice LLP

Residential Property CGT On Sale – Changes Explained
Taxing Times Questions

The Question:

I have several buy to let properties, one of which I shall be selling in the next few months. I understand that I will have to pay tax on the gain soon after sale due to a change in rules. Can you explain what the new rules will mean for me?

Kirk Rice LLP answers:

A CGT liability can arise on the disposal of residential and commercial property should you sell (or gift it away) for more than you paid for it. From 6 April 2020, a new regime will apply which shall require a taxpayer to file a ‘return for a disposal of UK land’ within 30 days of the disposal, and to pay the capital gains tax arising before those 30 days have elapsed. The new UK return is in addition to reporting the disposal on the normal Self Assessment tax return; it does not replace it.

There are a number of practical implications for the new regime;

  • Calculating the CGT payment should be straightforward for those with relatively stable sources of other income. The position will be more complicated where income is erratic, where an event after the date of completion impacts overall income levels or where multiple disposals take place in a tax year.
  • Law firms do not generally get involved with their clients’ tax affairs. Similarly, tax compliance will generally be beyond the remit of an estate agent. The obligation to file a return falls wholly on the taxpayer, and it will be wise to engage an accountant or tax adviser to undertake the calculations.
  • While there is nothing to prevent a ‘reasonable estimate’ being used to calculate the capital gains tax payment on account, any understatement of the taxpayer’s liability will lead to interest charges and possible penalties if the return contains careless errors.
  • Other practical issues include the need to obtain valuations, for example, a probate value where the property is inherited. Where the disposal is by way of gift other than on death, a valuation at the date of the gift will similarly be required. Gifts between spouses and civil partners will be exempted from the rules.
  • Capital losses arising after a residential property gain has occurred will be offset in the taxpayer’s Self Assessment return, and repayment of tax will be generated at that point. However, there could be many months that lapse before being able to file the Self Assessment return and obtain the refund. HMRC will pay interest on the overpayment; however, this is unlikely to cut much mustard with taxpayers who are left waiting for substantial refunds under these rules.

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It is worth dispelling a myth at this point. People often think that if they own just one residential property, then that property will be fully exempt from CGT on the sale, regardless of whether or not they have lived in it as their home throughout the period of ownership. This is not true.

Unless the property was your principal private residence, home and habitual abode throughout the period of your ownership (subject to a few limited circumstances), you might be caught by these new rules. If, for example, you buy your first property, live in it for three years, then let it out to generate some income. Then at the same time as letting it you move to live back with your parents, or perhaps rent a property elsewhere to live in, the property you own will become subject to capital gains tax on a proportion of the uplift in value. You would get Principal Private Residence relief for the period of actual occupation and (from 6 April 2020) the last nine months of ownership, which means that there may be a chargeable period to account for.

Under the above example, you would be required to calculate the capital gains tax position, submit a UK return and pay any tax arising all within 30 days of the completion of the sale.

You will not be required to submit a return where:

  • There is a transfer of property between spouses or civil partners.
  • You entered into a legally binding contract for the sale before 6 April 2020.
  • You meet the criteria for full Private Residence Relief.
  • Total capital gains (including those from the disposal of other chargeable residential property in the same tax year) are within your tax-free allowance (£12,300 from 6 April 2020).
  • You sold the property at a loss.
  • The property is situated outside the UK.

If you are a non-UK resident selling UK residential property, you will be required to file the Non-Residents Capital Gains Tax return, and settle any capital gains tax, all within 30 days of completion.

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Any reader interested in discussing how the residential property CGT changes and actions should email info@kirkrice.co.uk to arrange an appointment with one of our Tax specialists.

Please note: answers are given for general guidance only and specific advice should be taken before acting on any of the suggestions made. Tax treatment is based on individual circumstances and may be subject to change in the future. Information is based on our current understanding of taxation legislation and regulations. Any levels and bases or, and reliefs from taxation, are subject to change. The Financial Conduct Authority does not regulate tax planning.