Capital Gains Tax changes are here… and there’s more to come

Alexandra Docherty

Alexandra Docherty

Partner and Head of Private Client Tax

25 August 2020

This article first appeared in The Courier on 17 August 2020.

New rules tightening the deadline for payments of Capital Gains Tax (CGT) on residential property came into effect in April.

Now, a seller must pay CGT, if due, and file a return within 30 days of completion on a sale. The Chancellor has also ordered a full review of CGT rules which serves as an indication that there are more changes to come.

If you were planning on making changes to your asset base, now could be a good time to get things started, as it’s unlikely CGT will remain at its current low rate.

Let’s tackle the reporting changes first. From 6 April 2020, if CGT is due, a return must be submitted to HMRC, with an estimate of the amount due, and payment made within 30 days of completion. There was an initial breathing period whereby HMRC did not issue penalties, but for transactions completed from 1 July 2020 these must be reported within 30 days otherwise a late filing penalty will apply.

If the tax ultimately owed differs from the estimate, the balance will be due or refunded following the submission of the annual tax return. Originally CGT had to be paid by 31 January following the year in which the gain was realised, which gave up to 21 months for payment. A stark difference to the new rules.

It’s important to note that this new deadline for CGT payments even applies when a property is transferred into a trust or gifted to a family member. These two are disposals and so you need to consider how to manage payment of CGT, if due, within 30 days. This makes it incredibly important to work with your accountant to help plan any changes you are considering to your asset base.

Most people don’t pay CGT on the sale of their main residential home because of a very valuable relief called Principal Private Residence (PPR) Relief. Meaning, if you occupy the house you are selling as your main residence, no CGT will be owed. So, CGT usually only kicks in on the sale of a second home or if you have not occupied your main residence for the entire period of ownership, perhaps due to working elsewhere or letting out part of it. Many farmers and landowners may have more than one residential property on their land; they may live in the main farmhouse and have other farm cottages where other family members live, or that they rent out. If any of the cottages were sold, PPR relief would not be available as it’s not the main residence of the owner, so this is where CGT could arise for payment.

What’s next for CGT?

Well, With UK borrowings at record levels and tax revenues down as a result of the current COVID-19 pandemic, there has been speculation that tax rises are looming to help plug the UK deficit. At the moment CGT rates are historically low, so it is not out with the realms of possibility that we could see CGT rates brought more into line with income tax rates. PPR relief may also find itself up for review, given it costs the Government over £27 billion per year (2018/2019). With the Government incentivising people to buy property at the moment with the temporary reduction in Stamp Duty Land Tax (SDLT) and Land and Buildings Transaction Tax (LBTT), we could see a tax aligned with the proceeds of the sale that the seller would pay, as opposed to the buyer paying tax on the purchase.

So, with these potential changes looming, what are your options? Well, now is a good time to review your asset base fully with your accountant to assess your current CGT position - what assets do you own that are currently sitting with a gain? Do you have assets that are sitting at - or below - their original purchase price? If succession planning has been on your mind, then given the reliefs currently available to help you pass assets on in a tax efficient way from a CGT and Inheritance Tax perspective, then now could be the time to take forward your plan.

Contact us

If you have any questions about CGT, please do not hesitate to contact me, or your usual Johnston Carmichael adviser.