Are you planning on selling a UK residential property next year? A key change to capital gains tax (the tax paid on the sale), comes into effect in April for UK residents. From 6 April, CGT must be paid within 30 days of sale. What does this mean in practice?

What is residential property?

Residential property can include a building suitable for use as a dwelling and also land that includes a building which is currently being built or converted for use as a dwelling.

What does this change mean?

This is a fundamental change for those selling or gifting second homes or rental properties at a gain as it requires a return and a payment on account of the CGT (where applicable) within 30 days of completion.  In addition, the gain will still need to be reported in the usual way via the self assessment tax return.  The payment on account is mandatory and, for the disposal of UK residential property by UK residents, it is not possible to elect to pay the CGT via self assessment. 

The rate of CGT payable is determined by the income in the tax year of disposal.  Clearly, if a disposal takes place near the start of the tax year, an individual’s income may be unknown at the point of sale and, in these circumstances, it would be necessary to estimate the income to determine if any basic rate band remains, which could mean part of the gain is taxed at 18% and the balance at the higher rate of 28%. 

When determining the level of gain, any brought forward losses and the annual exemption can be considered. 

A few exclusions from the rules include disposals by charities and pension fund investments.  Furthermore, a return and payment on account within 30 days of completion will not be required where there is no tax payable, e.g. the gain is fully covered by private residence relief, brought forward losses or the annual exemption.  However, such gains may still need to be reported via the usual self assessment return.    

In circumstances where the actual CGT is less than the payment on account made, HMRC should refund any CGT overpaid once this is known, which is likely to be following submission of the self assessment tax return.    

As we draw nearer to April 2020, timing of a disposal should be considered. 

For disposals falling on or before 5 April 2020, a payment on account would not be required and, instead, the CGT would be payable via self assessment by 31 January 2021. 

As mentioned above, the return and payment are due within 30 days of completion.  HMRC determines the completion date as being completion of the conveyancing, which can differ to the usual CGT disposal date (date of exchange of contracts).  Where these two dates straddle a tax year, the CGT will be credited to the year of disposal based on the date of exchange of contracts.  It remains to be seen how this will work in practice in terms of allocation of the payment to the correct tax year. 

Gains arising from non-residential (commercial) property by UK residents (note that such disposals by non-UK residents are subject to the 30 day reporting and payment window) will continue to be assessed via self assessment with the CGT on such disposals being payable by 31 January after the end of the tax year.  In contrast, under the new rules, an individual selling UK residential property will be required to pay the CGT on a residential gain within 30 days of completion.

For a mixed use property, an apportionment of the gain would be required as only the residential element needs to be returned under the new rules. 

In summary, the changes from 6 April 2020 are likely to impact a number of individuals and brings forward the CGT payment date on the sale of UK residential land by UK residents. 

Got a question?

If you would like to discuss any aspect of the above, please don't hesitate to get in touch with me.