Tax

The rules of UK residential property disposals

Jan 10, 2020


New legislation from the UK government has changed the rules of UK residential property disposals. Maybeth Shaw tells us about these changes and what tax filing and payment obligations need to be adhered to post-6 April 2020.

The UK government has passed legislation which will have a major impact on the filing and payment obligations of certain UK resident taxpayers who sell UK residential property from 6 April 2020, applying to both individuals and trusts and only to capital gains tax (CGT). It does not apply to UK resident companies (and, from 6 April 2020, non-resident companies) which are subject to corporation tax on capital gains.

This change was initially proposed in 2015 in order to reduce the time between a gain arising on a residential property sale and the tax being paid (in order to bring it closer to the position for other taxes). The April 2020 changes represent an extension of provisions which have applied to the disposal of UK residential property by non-resident persons from 6 April 2015, which was extended from 6 April 2019 to non-residential.

Disposals before 6 April 2020

Currently, a UK resident individual or trust disposing of UK residential property that results in a taxable gain is required to report that gain on their annual UK self-assessment tax return. The deadline for reporting the gain and paying the tax due is the 31 January following the year of the disposal.

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 “residential property return” within 30 days of the completion date of the disposal. Penalties will apply if the return is filed late.

The vendor will be required to pay an estimate of the CGT within 30 days of the completion date. This will be treated as a ‘payment on account’ against their total income tax and CGT liability for that year when their annual self-assessment tax return is submitted by 31 January after the tax year of disposal, if filed online.

The individual or trust will, therefore, be required to estimate how much tax is payable. This will depend on several factors which could result in a refund/additional liability being due when the self-assessment return is submitted. If additional tax is due when the annual return is filed, then interest will be payable at the standard rate set by HMRC.

Exceptions

Some common examples of where a return will not be required are:

  • Where the gain is wholly covered by principal private residence relief for the duration of the taxpayer’s ownership.
  • If a loss arises on the sale of the property.
  • The gain is sheltered by capital losses crystallised before the sale takes place.
  • The gain is small enough to be covered by the individual’s annual exemption for the year of disposal.

The return and payment on account will not be required where the property disposed of is not a residential property or where the property is situated outside the UK.

From a practical perspective, the taxpayer will need to rapidly determine whether (or to what extent) their gain is sheltered through principal private residence 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. As these can take time to assess/calculate, it will often be worthwhile to assess them before the sale has completed.

Non-UK residents

Non-UK residents have already been required to file returns within 30 days when they have disposed of UK property, both residential and non-residential, since 6 April 2015 and 6 April 2019 respectively. There are no changes for disposals by non-UK resident individuals or trusts from 6 April 2020.

Action from 6 April 2020

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. For example, this could be the case where the tax liability depends on other disposals or other income in the same tax year.

It would, therefore, be prudent to contact your tax advisor much sooner (ideally before completing the transaction) when making residential property disposals in order to submit the returns on time and to determine an appropriate estimate of the CGT liability.

Maybeth Shaw is a Tax Partner in BDO Northern Ireland.