Big changes to CGT on residential property gains is on the way

From 6 April 2020 owners of residential property in the UK will have to think carefully about the timing of any sale or gift of their property.

That’s because from that date, UK resident owners of UK residential property who realise a gain on disposal that is subject to tax will need to report the gain and make a payment on account of the tax due within 30 days of the completion of the transaction.

Similar rules already apply to individuals who are not resident in the UK and dispose of UK residential property, although these are also being updated next April (see story below).

“This new 30-day window is a significant timing change,” says Chris Hadley, head of Harwood Hutton’s Private Client department. “As it stands, where a CGT liability arises for UK residents on the sale of a residential property, the liability is declared through the normal self-assessment process and is payable by January 31 following the tax year in which the gain arises.

“If a residential property owner is expecting to sell other, non-residential assets at a loss in the same tax year as they dispose of a residential property, they will from 6 April 2020 need to judge the timing of the transactions to avoid the negative cash flow consequences of having to wait to recover any overpaid tax.”

Chris explains that when calculating the gain on the residential property, you can only take into account losses that have occurred prior to completion. You cannot adjust the tax due for subsequent losses until after the end of the tax year.

“An individual might not complete their tax return until some months after the end of the tax year, so the excessive payment on account could potentially be held by HMRC for up to 21 months.”

The measure will apply to individuals, trustees and personal representatives who dispose of UK residential property. It will cover disposals including sales, gifts or transfers in or out of trust. The measure only applies where a gain is realised and tax is due to be paid. If the gain is covered by a relief such as private residence relief so that no tax is payable, then no report is required.

Changes to CGT on UK Property for Non-Residents

Under existing legislation, non-resident individuals are required to complete a Non-Resident Capital Gains Tax Return within 30 days of the sale of any UK residential property.

They are also required to calculate the CGT liability arising and make a payment on account of the full amount of the calculated liability within that 30-day period.

These rules have been in place since April 2015 and where a gain arises, there are three options that can be used for the calculation:

• Rebasing the cost of the property to the market value at 6 April 2015
• Time apportioning the gain for the pre- and post-April 2015 periods of ownership
• Calculating the Capital Gain under normal rules using the original base cost (usually used where a loss arises).

From April 2019, the scope of this legislation was extended to include the sale of non-residential land and property in the UK by non-resident individuals, trusts and companies. Such disposals had previously been exempt from UK CGT.

Where these non-resident CGT returns are completed by individuals already in self-assessment, there is currently the option to make an election to pay the CGT liability through self-assessment instead of within 30 days. This defers the tax payment becoming due until 31 January after the end of the relevant tax year. However, this option will be removed from April 2020.

For Capital Gains on the sale of non-residential property, the same options for undertaking the calculation of the gain will be available but the rebasing and time apportioning will be based around April 2019 instead of April 2015.

All non-UK companies, including close companies, caught by this legislation will be charged corporation tax rather than CGT on their gains.

All non-UK resident persons will also be taxable on indirect disposals of UK land, which will apply where a person makes a disposal of an entity that derives at least 75% of its gross asset value from UK land, although there will be an exemption for investors who hold an interest of less than 25% in the entity.

The gains on indirect disposals will be calculated using the value of the asset (e.g. shares) being disposed of rather than the value of the underlying UK land.

Capital Gains Tax Rates

• A rate of 10% applies to the amount of gain falling into an individual’s basic rate tax band for income.
• A 20% tax rate applies to any gains above the annual allowance.
• Individuals can benefit from a rate of 10% on gains qualifying for Entrepreneurs’ Relief.
• 20% is applicable to trustees or for personal representatives of someone who has died.
• There is an 8% surcharge on all rates for gains on residential property or carried interest.

Transfers between spouses

Spouses and civil partners are taxed as separate individuals, with each spouse being entitled to his or her own annual exemption. If you are married, or in a civil partnership, and gains are expected to exceed your annual allowance, you can transfer assets into your spouse’s name and also use up their allowance.

These transfers are deemed to have transferred for an amount which gives no rise to a loss or a gain and are therefore tax-free. So individuals can sell assets with large gains that previously belonged to their spouse (which are now in their name) to mitigate or reduce potential CGT

If you have any queries regarding any of these changes please contact Chris Hadley