From 6 April 2020 changes to the way UK resident individuals, trustees and personal representatives report the disposal of UK only residential property came into effect. The changes will mainly affect those disposing of a second home, a rental property, or properties that have not been occupied as a main residence throughout the period of ownership.
Previously any UK resident individual, trustee or personal representative disposing of residential property was required to declare the disposal on a Self-Assessment Tax Return within nine months following the end of the year in which the property is disposed of.
Any Capital Gains Tax (CGT) due would also be payable by 31 January following the end of the year in which the disposal took place.
Those not within the Self-Assessment system could report and pay CGT using the ‘Real Time’ CGT service but must have done so by 31 December following the end of the tax year in which the disposal takes place.
The new rule
From 6 April 2020, in a move to bring UK residents in line with non-UK residents (and to collect tax much sooner), the disposal of residential property will need to be reported to HM Revenue and Customs within 30 days of sale. Gains realised on the disposal of property that has been both residential and non-residential are to be apportioned. For the purpose of the start of the 30-day window, the date of sale is the date of completion and not the exchange of contracts, which is usually used for CGT purposes and will remain the date of sale for CGT calculation purposes. The payment of any CGT due will also need to be made within the 30-day window.
When does the rule not always apply?
This new rule does not apply in all cases. Those whose capital gain is fully covered by Principal Private Residence Relief, brought forward losses or those that have been realised prior to this disposal, their annual exemption or where a nil gain/nil loss arises, will not need to file a Return within 30 days and should report the disposal in the normal way via self-assessment where applicable.
Where a sale of a main residence which is only covered by partial relief e.g. the owner has had periods of absences, will need careful consideration to ensure the 30-day deadline is not missed.
Failure to file the Return within the 30 days will result in a late filing penalty of £100 being charged. Where a Return is still outstanding at 6 and 12 months, penalties of £300 or 5% of the tax due, if greater, will also be charged. Any late payment of the CGT due will incur interest charges. A penalty equal to 5% of the tax outstanding will be charged if the liability is not settled within 30 days of 31 January following the end of the tax year of disposal.
Additional 5% penalties will arise if the tax remains outstanding after a further 5 and 11 months respectively.
Losses available and CGT exemption
When calculating the CGT payable (for residential property gains the rate is normally 18% or 28% or a combination of both), losses available at the date of disposal and the annual CGT exemption can be used alongside a ‘reasonable estimate’ of the individual’s income for the tax year concerned. This is due to the fact that a disposal Return may have to be filed before the end of the tax year.
The estimated tax due will be regarded as a ‘payment on account’ until the actual amount can be calculated and reported to HMRC via the Self-Assessment Return. Any tax overpaid can only be reclaimed once a Self-Assessment Return has been submitted.
Therefore, if you are now planning on selling a residential property, careful consideration beforehand may be required to ensure that all relevant information can be gathered, CGT calculations, and the required Return(s) prepared to allow for the submission of the Return(s), and the payment of tax due, within the 30-day window.
Full withdrawal of higher rate interest relief on residential let properties
Landlords have come under (tax) fire in recent years, and the restriction on the deductibility of interest relief for individuals has been phased out over a number of years, with only 25% of allowable costs being fully deductible in 2019/20. From April 2020, the availability of higher rate tax relief on loan interest paid to finance rental properties is fully withdrawn, meaning all individuals will only get 20% tax relief on these sums paid. Similar restrictions do not apply to company landlords.
Those who are currently basic rate taxpayers could be forgiven for thinking this will have no effect on them as the rate of relief will not change. However, the way in which interest costs are now relieved has changed for everyone and could have unforeseen knock-on effects.
Currently, interest relief is given as a credit against calculated tax liability, rather than as a deduction from income. By way of example, using 19/20 tax rates and assuming no gift aid or pension payments, someone with a salary of £37,000 plus rental income of £15,000, and £8,000 allowable interest would previously have had taxable net income of £44,000 (salary plus rental income less interest). Now, the same situation gives taxable income of £52,000 (salary plus rental income), which would push the taxpayer into paying tax at 40%, although there would be a tax credit of £8,000 at 20% deducted from the tax bill. In this example, the taxpayer ends up paying £400 more tax than before. This can have a similar knock-on effect for capital gains tax rates.
Another area that could be affected is the personal savings allowance; basic rate taxpayers are entitled to receive £1,000 of interest tax free, but those taxable at higher rates are capped at £500 instead. Similarly, where items are means tested, such as child benefit, the taxable income figure is used. In the example above, the taxpayer in receipt of child benefit would now have a High-Income Child Benefit charge that would need including on a Self-Assessment return.
What happens next?
If you would like to discuss any of the above points in further detail, please speak with your usual Campbell Dallas contact or:
The information in this blog should not be regarded as financial advice. This is based on our understanding in April 2020. Laws and tax rules may change in the future.