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Residential property owners need to be aware of a change to the Capital Gains Tax (CGT) rules, which aims to raise extra tax from the sale of residential properties and enable HM Revenue and Customs (HMRC) to collect it more quickly.

Most people who have lived in their main residence continually throughout their ownership will not be affected when they dispose of the property. However, the situation is different for those who own other types of residential property, such as UK holiday homes and buy-to-let flats, so theywill need to be especially vigilant to avoid penalties.

Tax rule change

Currently, CGT is paid up to 22 months after the date a property is sold. Under new legislation in the Finance Act 2019, which comes into force on 6 April 2020, the tax must be paid within 30 days of the sale. Property owners who fall foul of the new rule may incur a penalty and have to pay interest on the sum owed.

The change impacts properties that are not the taxpayer’s main residence, except where the main residence exceeds 5,000 sq. m. and is partly used for business purposes. Owners of holiday homes, landlords of buy-to-let properties and owners of properties that are inherited and have not be lived in as a main residence are all subject to the new CGT regulation. Residential properties outside the UK are not affected.

Online CGT return

Although exchange of contracts is deemed the date of sale for CGT purposes, the property sale completion date will now trigger the requirement to complete and submit an online CGT return to HMRC and pay the tax due. Taxpayers will need to set up a Government Gateway account or authorise an accountant or agent to act on their behalf.

Returns are not required if gains are within the overall individual taxpayer CGT allowance of £12,000 per annum, and there is no need to file a report if there is no loss or gain, as no tax is due. There is provision to amend CGT returns, whilst enquiries and inaccuracies, along with late filing, are covered by existing legislation.

Calculation

The tax calculation itself if less than straightforward. CGT is payable at either 18% or 28%, and taxpayers will be required to estimate the tax due based on their income in the tax year. This should be relatively simple for anyone with a steady and predictable income, but more problematic for those whose income fluctuates as well as people who dispose of more than one property.

Taxpayers are entitled to offset capital losses. Therefore, if a property owner sells more than one house in a year, the CGT is based on the second disposal and any tax paid on the first sale is deducted from the total amount due. The cumulative amount of CGT is calculated for each disposal and the net tax is then due to be paid or an overpayment is due for refund. As is currently the case, the final CGT liability will be determined through the self-assessment system.

Prepare in good time

It’s important that taxpayers assemble all relevant information in good time, so that the gain and CGT liability can be calculated. The information required will include date of acquisition, cost of purchase, details and value of improvements, legal fees, tax reliefs that can be claimed and losses that may offset a CGT liability. Anyone who is planning to sell a property should therefore alert their adviser at an early stage and not leave it until they begin processing their annual self-assessment tax return. 

For taxpayers this new rule represents a major change to the way in which HMRC deals with CGT on residential properties. Contact us on 01785 243276 for advice on how it will affect you.