New Property Rules could trip up Sellers

Frequently Asked Business Question:

I inherited property many years ago and I am now keen to sell it as the property market looks quite strong at the minute. The property has significantly increased in value in recent years and there will be a large capital gain. When do I pay this tax?

Top Tip:

From April 6, 2020, all UK resident individuals, trustees, and personal representatives who gift or sell UK residential property must calculate, report and pay an estimate of the capital gains tax liability within 30 days of the date of completion. This ‘in-year’ reporting is a big change from only reporting such disposals after the end of the tax year via self-assessment – and requires taNew Property Rulesxpayers to use special rules to determine their estimated CGT liability before the end of the tax year. Only those with residential property disposals where a CGT liability does not arise (for example because private residence relief covers the gain) are excluded from these reporting requirements.

The new provisions primarily affect landlords and second-home owners. They are based on similar rules for non-residents introduced in April 2015.

Most taxpayers are used to tackling tax on an annual basis via self-assessment, this extra in-year report is a big change. While HMRC did allow for a penalty-free ‘soft landing’ period, this only applied for disposals that took place in the first three months of the 2020/21 tax year. Those who miss the deadline after that time without a reasonable excuse will find themselves liable to a £100 fine.

All taxpayers – even those who want to appoint an agent to handle the reporting – need to set up a Property Account through the service in order to proceed. As part of the process of creating this account, the taxpayer will need to go through the Government Gateway and verify their identity. Once that step is completed, they will get a username and password with which they can access their Property Account.

Confusingly, the UK Property Reporting Service is a standalone service, and not part of the Personal Tax Account (PTA) which around 14 million people accessed last year. The property service can only be accessed by following the links on the UK Property Reporting Service pages. However, anyone who has already set up a Government Gateway to access their PTA will be able to use the same login credentials on those pages to set up a Property Account relatively painlessly.

As the report has to make ‘in-year it is likely to contain estimates – either of the individual’s income or possibly of figures relevant to the computation of the gain itself.

For those who, apart from the disposal of the property, would not be required to complete a self-assessment return, it should be possible to finalise their affairs entirely through the UK Property Reporting Service by correcting any estimates of income, valuations, residency, or reliefs through the service and thus avoid coming into self-assessment altogether. (The classic example here will be a second-home owner with employment income who is not normally in self-assessment but whose income changes after the report because of an unexpected bonus, change in hours, or job loss which then affects the tax due.)

But for landlords and others already in self-assessment for other reasons – including those with other gains or losses which need to be taken into account to finalise their CGT position – it is important that the disposal is reported again as part of their self-assessment. The SA108 pages have been updated accordingly to request details of previously reported disposals.

One area of concern for taxpayers is what happens when an individual is due a refund of the CGT paid on account during the year, as it does not appear that HMRC’s self-assessment proforma computation will allow the excess to be offset against any wider self-assessment liability.

The new reporting rules were introduced in April 2020 for UK residents disposing of UK residential property could be in for a shock when new rules requiring them to report and pay their CGT liability with 30 days of completion took effect. It should be noted that some 13,000 people got a shock in the last six months of 2020 with HMRC issuing penalties for missing the deadline. It is important for all people disposing of property to be aware of the new rules and take appropriate action.

For more information and/or assistance, please contact our Tax Team who will be pleased to help you.

The advice in this column is specific to the facts surrounding the questions posed.  Neither FPM nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.