If you’re about to sell a residential property, there are capital gains tax (CGT) changes which have been in force since April 2020.
Under the previous rules, you had a maximum of almost two years to report and pay your CGT bill on gains arising from property sales. But from April 2020, you’ll only have 30 days to sort out your calculations and pay the CGT tax you owe to HMRC – and this is likely to cause significant issues for landlords and property investors looking to sell one or more properties from an existing portfolio.
Jon Chambers explains the key impact of this change to CGT and the importance of talking to your advisers sooner, rather than later.
A significant change to the Capital Gains Tax rules
Selling a residential property can be a complex and stressful experience at the best of times. But having only 30 days to work out your CGT liability on the sale is a massive upheaval.
Thousands of people who dabble in property are likely to be affected. And if you don’t get it right, HMRC will soon be on your case – and that could mean some quite significant penalties and costs for affected taxpayers.
Understanding the tax implications
You might have watched a TV property show and decided that becoming a property investor is a great way to create a return. But the reality is that most people won’t know the legal or tax implications of buying and selling a property as an investor.
Keeping up with tax law, and your obligations as a property investor or landlord, can be a complex business. And this is a BIG change to CGT that’s likely to catch many people out.
HM Revenue & Customs (HMRC) should really be shouting about these CGT changes from the rooftops, so people are aware. However, some of the terminology is ambiguous and talks about making ‘payments on account’, which despite being technically correct, suggests that not all of the tax is payable at once, which it is.
What will the impact of these changes be?
If you had exchanged on the sale of an investment property on 10 April in the 9/20 tax year, you’d have until January 2021 to pay the tax – giving you almost two years to sort out the details and the funds to make the payment. It depends which month you sell in, of course, but there’s currently a fairly sizable gap between sale and tax bill.
HMRC have offered a ‘real time’ Capital Gains Tax service since 2016, enabling individuals to report and pay early. Whilst the uptake of this voluntary service is uncertain, the formal deadline to submit your tax return and pay the tax under Self-Assessment has for many years been 31 January, following the end of the tax year in which the gain was made.
That gap between sale and payment will soon be reduced down to 30 days, which is a huge change and a big deal for many. Suddenly, you need to have the funds to pay this tax bill within a very small window – and HMRC (rightly or wrongly) think you’re more likely to have the funds when you’ve literally just sold the property.
Who will be affected by these changes?
Private investors and landlords are the main people who will be affected by this CGT change. If you’re buying to sell, you’re out of the scope. Those people renovating a house and then putting it onto the market won’t be hit as they’re performing a trade, not investing. However, if you gift a property to a member of your family or sell your main home but have not lived there throughout, you will need to be aware of these new rules.
Let’s look at a quick example from the perspective of a landlord…
Someone may have been renting out a 3-bed property for 15 years, and decides to sell it to free up some cash and invest in something else. If they put the house on the market and have a gain sitting in there as a capital asset they WILL be hit.
For those that fall within the scope of CGT, there are two key things to do if you’re planning to sell a property in the near future:
- Calculate what your gain is – this means knowing your original purchase costs and what costs are deductible (i.e. legal fees, SDLT fees, fees incurred when buying it at the time). All the improvement costs can be deducted if you’ve bought, done up and rented it out. However, if you’ve made improvements over 30 years, that’s a lot to work out!
- Making the actual payment to HMRC – the deadline for payment is 30 days from completion of the sale. CGT works on an exchange basis, usually, but with property sales, exchange and completion rarely happen on the same day. So, thankfully, HMRC has changed the initial date to the completion date instead. After all, you can’t pay if you haven’t yet received the funds from the sale.
To work out your gain, you’ll need an accountant to help you. You’re unlikely to have records going right back to the start of your ownership – but you do need invoices and receipts to prove any renovation costs and be able to claim any kind of relief.
The move to digital tax and online payments
HMRC is at least trying to make it easier to pay up. You can now pay online and do it early.
This is part of HMRC’s global Making Tax Digital (MTD) plan for getting us paying online and doing it on time. The aim of MTD is to move all tax records, submissions, returns and payments into the digital space, making it easier for individuals and businesses to get their tax right and keep on top of their affairs.
Over time, the way we pay income tax or CGT is likely to change to quarterly payments. So being able to pay your CGT bill online – and to do it early, before the deadline – is part of a wider piece of getting us all paying digitally. For income tax and CGT, MTD is expected to apply from 2021/22.
Key benefits of the MTD approach will be that you have:
- An online portal where you can access all your tax information
- All your records and returns centralised and linked up digitally
- A simple and straightforward way to pay your tax bills.
Moving to a digital system should mean there are less missed payment deadlines – saving everyone the hassle of court cases and penalties.
Key ways that Haines Watts can help you
So, if you fall within the scope of CGT and will be affected by these new changes, what do you do? In most scenarios, engaging with an experienced accountant will be the easiest way to navigate the complexities of the CGT rules.
We can help you by:
- Setting out the key pieces of information you need
- Registering you with HMRC and acting as your tax adviser
- Sitting down and going through exactly what had been done for the property, what’s been claimed against the rental properties and where there have been improvements – to make sure you get as much relief as possible
- Calculating your gain and your tax liabilities
- Putting HMRC at ease by dealing with a reputable accounting firm
- Providing a hand-holding service for those that need it, acting on your behalf with HMRC and providing an end-to-end service to cover your tax obligations.
- Connecting you with external independent financial advisers (IFAs) to advise you on investing the proceeds of your property sale
If you tell us in advance of your property plans, we can go through the calculations early, extending that 30-day window.
With our network of specialists in tax, property law and accounting, we can provide you with a holistic approach to the financial management of your property investments – and give you that ongoing peace of mind.