Reporting Capital Gains on residential property

The Capital Gains Tax (CGT) reporting and payment date for UK residents that sell a residential property changed from 6 April 2020. This change means that any CGT due on the sale of a residential property needs to be reported and a payment on account of any CGT due made within 30 days of the completion of the transaction.

In practice, this change will only apply to the sale of any residential property that does not qualify for Private Residence Relief (PRR). The PRR relief applies to qualifying residential property used wholly as a main family residence.

HMRC has listed the following types of property sales that are affected:

  • a property that you have not used as your main home;
  • a holiday home;
  • a property which you let out for people to live in;
  • a property that you have inherited and have not used as your main home.

This new reporting requirement does not apply to sales of your home if the private residence relief was available for the period of your occupation. There can be penalties and interest if any CGT due is paid late. Note, the payment date for any CGT due on residential property sales made in the year before 6 April 2020 will be 31 January 2021.

There were also changes to the PRR rules which saw the final exempt period for CGT purposes being reduced from 18 months to 9 months – from 6 April 2020. This relief applies even if the homeowner was not living in the property when it was sold. The time period can be extended to 36 months under certain limited circumstances.

Spring Budget 2020 – Entrepreneurs’ Relief

The Chancellor confirmed that a review into the effectiveness of Entrepreneurs' Relief has now been completed. Where this relief is available Capital Gains Tax of 10% is payable in place of the standard rate. The Chancellor had many representations saying that the relief is ineffective and expensive and should be abolished. In fact, the Chancellor confirmed that three quarters of the relief goes to just 5,000 people with the relief currently costing government £2.6bn a year.

However, Chancellor Sunak, decided not to abolish the relief but rather to reduce the lifetime limit. Therefore, with immediate effect from Budget date, 11 March 2020, the lifetime limit is being reduced from £10 million to £1 million. There will be special provisions for disposals entered into before 11 March 2020 that have not been completed.

On balance, most entrepreneurs will probably be satisfied with this change as there was a lot of pressure on the Chancellor to fully remove this relief. The change in the limit will not impact over 80% of claimants and will, according to HMRC, encourage genuine risk takers and entrepreneurs’ in a fair way. This should help encourage the view that the government remains supportive of the development of new businesses.

There are a number of qualifying conditions that must be met in order to qualify for the relief. The new £1m lifetime limit means that individuals can qualify for the relief more than once subject to an overriding total limit of £1m of qualifying capital gains.

Spring Budget 2020 – Capital Gains Tax

The annual exemption for individuals is currently £12,000. From 6 April 2020, this will increase to £12,300. A husband and wife each have a separate exemption. Same-sex couples who acquire a legal status as civil partners are treated in the same way as married couples for CGT purposes.

The annual exempt amount is increased annually to keep pace with inflation in-line with rises in the Consumer Prices Index. Most trusts have an annual exemption of £6,000 (increasing to £6,150 in 2020-21). Where the remittance basis is claimed by a non-UK domiciled individual, the taxpayer is not entitled to the annual exemption. There are special rules for gains that qualify for Entrepreneur’s relief and / or Investor’s relief.

CGT is normally charged at a simple flat rate of 20% and this applies to most chargeable gains made by individuals. If taxpayers only pay basic rate tax and make a small capital gain they may only be subject to a reduced rate of 10%. Once the total of taxable income and gains exceed the higher rate threshold, the excess will be subject to 20% CGT. A higher rate of CGT applies (18% and 28%) to gains on the disposal of residential property (apart from a principal private residence).

The usual due date for paying any CGT owed to HMRC is the 31 January following the end of the tax year in which the capital gain was made. From 6 April 2020, this will change for any CGT due on the sale of a residential property by a UK resident. The sale will need to be reported and any CGT due paid within 30 days of the completion of the sale transaction.

Residential property sales from April 2020

We have included updates in our newsfeed earlier this year that sales of residential property subject to Capital Gains Tax (CGT) – from 6 April 2020 – will need to be reported and paid to HMRC within 30 days of completing the sale.

Here’s the type of property sales that HMRC say will be affected:

  • a property that you have not used as your main home;
  • a holiday home;
  • a property which you let out for people to live in;
  • a property that you’ve inherited and have not used as your main home.

So that we can help you meet this new deadline be sure to notify us in advance of the sale so we can gather together the information required to meet the new deadline. Penalties and interest may be applied if any CGT due is paid late.

This new reporting requirement does not apply to sales of your home as long as the private residence relief was available for the entire period of your occupation.

Meaning of goodwill for CGT purposes

Goodwill is a subject we hear about often but interestingly is rarely mentioned in legislation. In fact, the term 'goodwill' is not defined for the purposes of the Capital Gains legislation in TCGA 1992.

Most definitions of goodwill are derived from case law. At its simplest you could describe goodwill as the 'extra' value of a business over and above its tangible assets.

In the vast majority of cases, when a business is sold a significant proportion of the sale price will be for the intangible assets or goodwill of the company. This is essentially a way of placing a monetary value on the business's reputation and customer relationships. Valuing goodwill is complex and there are many different methods which are used and that vary from industry to industry.

HMRC’s internal manual states that:

'Most businesses can be expected to have goodwill even though its value is likely to fluctuate from time to time. The fact that goodwill may not be reflected in the balance sheet of a business does not mean that it does not exist. In the same way, the writing off of purchased goodwill in the accounts of a business does not mean that its value has decreased or that it has ceased to exist.'

Still time to utilise annual tax-free allowance

We would like to remind our readers that there is still time to use the annual exemption for Capital Gains Tax (CGT). In the current 2019-20 tax year, this amounts to £12,000. This means that there is no CGT to pay on the first £12,000 of gains where you dispose of chargeable assets, such as property or stocks and shares.

If you are a married couple or civil partnership, you should ensure that each of party utilises their full annual exempt amount wherever possible. Any unused part of the annual exempt amount cannot be carried forward and is forfeited if unused in the current tax year.

CGT is usually charged at a simple flat rate of 20%. If you only pay basic rate tax and make a small capital gain, they may be subject to a reduced rate of CGT of 10%. Once the total of taxable income and gains exceed the higher rate threshold, the excess will be subject to 20% CGT. A higher rate of CGT (8% supplement) applies to gains on the disposal of chargeable residential property.

Planning notes

  1. If you have sold or are planning to sell any assets in the current tax year, it is important to ensure that you take full advantage of the annual CGT exemption and arrange your affairs accordingly. For example, capital losses are deducted from gains before net gains are calculated. Crystallising a loss that will waste the annual exemption should therefore be avoided.
  2. Any CGT due on chargeable gains that relate to the disposal of residential property on or after 6 April 2020 will be due within 30 days of completion. If you are considering selling a property soon, it would be beneficial to do so before the end of the current tax year. In this way you will benefit from an extended time period to pay any CGT due. This is because the payment date for any CGT due on residential property sales made before 6 April 2020 will be 31 January 2021.
  3. If you sell a residential property that has always been your family home – no periods of sub-letting – the new 30 day reporting and payment window will not apply as the gain will be covered by the Private Residence Relief.

Gifts to spouse or charity

There is usually no Capital Gains Tax (CGT) to be paid on the transfer of assets to a spouse or civil partner. However, the gift is still treated as a disposal that has taken place for CGT purposes, on a no- gain no-loss basis. When the asset is ultimately sold, the gain or loss will be calculated using the disposal proceeds less the asset cost when first acquired by the original spouse or civil partner.

There are a few exceptions that couples should be aware of where the relief does not apply. This mainly relates to the use of goods which are sold on by the transferee’s business and for couples that were separated and not living together for the entire tax year when the assets were transferred. Spouses or civil partners that lived together at any point in the tax year when the assets were transferred can still benefit from these rules. If a transfer did not qualify then the asset must be retrospectively valued at the date of the transfer and the transferor is liable for any gain or loss.

There are similar rules for assets that are gifted to charities. However, CGT may be due where an asset is sold to a charity for more than what was paid for it and less than the market value. The gain in this case would be calculated based on what the charity paid rather than the market value of the asset.

Reminder of important CGT change from April 2020

A major change to the way Capital Gains Tax (CGT) is reported and paid will come into effect from 6 April 2020.  Currently, the usual due date for paying any CGT owed to HMRC on property disposals is the 31 January following the end of the tax year in which a capital gain was made. From 6 April 2020, any CGT due on the sale of a residential property by a UK resident will need to be reported and paid within 30 days of the completion of the sale transaction.

This change will apply to the sale of any residential property that does not qualify for Private Residence Relief (PRR). The new rules will mainly apply when selling a buy-to-let property or a second / holiday home. The new time-frame will also apply to the sale of any other residential property that does not qualify or only partially qualifies for PRR.

If your clients are likely to be affected by these changes, it would be worthwhile considering a property sale prior to 6 April 2020. For example, if a property is sold at the end of March 2020, any CGT will be due on 31 January 2021. If a property is sold on or after 6 April 2020, the CGT will be due just 30 days later. Interest and penalties will apply if any CGT due is not paid on time.

New tax deadline for property sales

The 6 April 2020 will see a seismic change in the deadline for UK residents that sell a residential property when Capital Gains Tax (CGT) on the sale is due. Currently, the due date for paying any CGT you owe to HMRC is the 31 January following the end of the tax year in which a capital gain was made. This deadline gave taxpayers between 10 and 22 months to settle their CGT bill.

The deadline will change for UK residents from 6 April 2020. This change will mean that any CGT due on the sale of a residential property will need to be reported and a payment on account of any CGT due (an advance payment towards their tax bill) made within 30 days of the completion of the transaction.

This means that there will be a significant difference in your CGT payment date if you sell a residential property before the end of the current tax year compared to making a sale in the new tax year. The payment date for any CGT due on residential property sales made before 6 April 2020 will be 31 January 2021. Any CGT due for residential property sales on or after 6 April 2020 will be due within 30 days of completion.

For non-UK residents, these CGT changes came into effect from 6 April 2019.

In practice, this change will apply to the sale of any residential property that does not qualify for Private Residence Relief (PRR). The PRR relief applies to qualifying residential properly used wholly as a main family residence. The new deadline will mainly apply if you are disposing of a second / holiday home, an investment rental property or a home that does not qualify or only partially qualifies for PRR.

Relief for CGT losses

Usually, if you sell an asset for less than you paid for it you would make a capital loss. As a general rule, if the asset would have been liable to CGT if a gain had resulted when sold, then the loss should be an allowable deduction. 

The exact treatment of losses depends on whether they are:

  • losses of the same year of assessment as the gains,
  • losses of earlier years of assessment,
  • losses of the tax year of death, or
  • particular losses which may, exceptionally, be carried back from a later year of assessment.

These deduction of an allowable loss from chargeable gains does not require a claim and does not extend the time limit for enquiring into the original loss claim.

Gains accruing in a tax year may be chargeable to CGT at different rates. Therefore, the tax effect of losses and the annual exempt amount set off against those gains can vary.

In most circumstances, allowable losses and the annual exempt amount can be deducted in the way that is most beneficial to the individual. This will usually be against gains that are charged at the highest rate.