Where CGT is due, currently a disposal of residential property is normally reported to HMRC on a self-assessment tax return, and any CGT must be paid by 31 January following the tax year of disposal. The government has noted that (depending on the timing of the sale within a tax year) this allows between 10 and 22 months after the sale of the property before the tax is due.
Concerned about the length of time before any CGT is paid, HMRC is planning for new rules from April 2020 which will require individuals and trustees disposing of a residential property to make a payment on account of the CGT within 30 days of the completion of the sale. Sellers will have to calculate, report and pay the CGT that they believe is due, within that short window.
As an example, if an owner exchanged contracts for the sale of a house next year on 15 April 2019 and the sale completed on 15 May 2019, the existing rules would apply and any CGT arising would be due after another 20 months, on 31 January 2021. By contrast, under the proposed rules, an exchange of contracts a year later, on 15 April 2020 with completion on 15 May 2020, would mean that the CGT had to be paid within a month, by 14 June 2020.
The new rules will significantly reduce the amount of time that those selling residential property will have to calculate and pay their CGT bill. CGT computations can be complex however and it can take time to establish all the necessary facts to make an accurate computation of the taxable gain. This highlights the greater importance now for property owners to gather and safely retain the records that will be needed to calculate capital gains on intended or future sales of their properties.
Even with the records to hand, such 'in year' reporting may create complications as many individuals will not know what rate of tax will apply at the time of disposal. This is because the applicable tax rate for CGT depends on the individual's total taxable income for the whole tax year, which can often only be estimated at the time of the disposal. Equally, individuals may make other disposals liable to CGT later in the year, which might affect the position. If the individual incurs capital losses later in the same tax year, then it is likely that the original payment on account of CGT will be found to be too large.
After making the 'in year' report, individuals will therefore need to review and revise the computation at the end of the tax year, either as part of their usual self-assessment return procedure or via a new 'end of year' reconciliation process, thus increasing the compliance burden. Furthermore, he or she will not be able to reclaim any overpayment until after the tax year has finished.
People selling their only or main home should not be affected by these new rules provided that they are entitled to full private residence relief which exempts them from having to pay CGT on the sale.
Thinking ahead, in preparation for these new rules, and while this task is important but not yet urgent, you may wish to start compiling the information listed below for each buy-to-let, second home, or holiday property that you may own. For future purchases, make sure that you keep these details safely.
If you have any queries regarding the type of information and records that you will need to retain, please speak to your usual contact at Watts Gregory.
Records and information to keep to hand for computing capital gains on residential properties
The preliminary information required to calculate capital gains on disposal of second homes or let residential properties, may include the following:
- The ownership history of the property;
- The original date (or dates) of the property acquisition;
- The circumstances of acquisition e.g. built/developed by the current owner, purchase from a third party, gift or inheritance from family member;
- The purchase cost plus expenses of acquisition (such as stamp duty land tax, solicitor's fees, estate agent's fees), or development cost including costs of planning permission and design fees, if relevant;
- The market value of the property at the date of acquisition, if relevant - where acquired from a connected person such as a family member - and whether a capital gains holdover claim was made to 'transfer' the connected person's gain to the current owner;
- If acquired before March 1982, the market value of the property as at March 1982;
- Whether any expenditure was incurred in refurbishing or enhancing the value of the property after its original acquisition/completion, that is still reflected in its current state, and if so the date or dates of the expenditure, the nature of the work carried out and the cost(s), and whether tax relief for the expenditure was claimed as a deduction for tax purposes from rental income.
- Whether the property has always been rented since acquisition/completion or has it at any time been occupied as the current owner's main residence, or occupied for business purposes - if either of the latter, keep a record of the history/dates for each type of use;
- Details for let properties of any capital allowances claimed by on the property or on fixtures in the property.
For a main residence sale, the following information may also be relevant:
- The dates from and to which the property has been occupied as your main residence;
- Was the property occupied as a main residence immediately from the acquisition date, and has it always been used as the main residence since then;
- Evidence of any tax election designating the property as a main residence, where more than one residence has been available;
- Has the property ever been rented out, and if so, the dates of periods during which it was rented out;
- Has the property or any part or room in the property ever been used exclusively for business purposes the current owner or spouse, and if so, the nature of use and the dates of periods during which it was so used;
- If there is a garden or grounds associated with the property, whether the area of the property is within 0.5 hectares (circa 1.2 acres), or if larger whether the garden or grounds are appropriate to the character and size of the property and any evidence (such as photographs) to indicate that the larger garden has been occupied and enjoyed as such with the property over the years of ownership.