Capital Gains Tax changes for buy-to-let landlords
Buy-to-let landlords need to be aware of recent changes to the rules for reporting Capital Gains Tax. rradar tax adviser Steve Tetley explains what’s changed and outlines how CGT is calculated so that landlords can remain HMRC-compliant.
If you are a buy-to-let landlord, whether just starting out in the sector or an established portfolio holder keen to rationalise your holdings, you may not be aware of the changes that have recently taken place to the rules for reporting Capital Gains Tax when you sell UK residential property.
rradar tax adviser Steve Tetley takes you through what’s changed and outlines how CGT is calculated so that you can ensure you’re fully compliant with what HMRC require.
The rule changes apply to disposals of residential property (generally this applies to property that is not someone’s main home, or has been let) and came into force from 6th April 2020.
If a residential property that is subject to Capital Gains Tax is disposed of, then this has to be reported within:
· 60 days of selling the property if the completion date was on or after 27th October 2021
· 30 days of selling the property if the completion date was between 6th April 2020 and 26th October 2021
This requirement also applies to non-UK residents.
There are different rules for capital gains in respect of other types of assets which are not covered in this article. For those gains, you have a choice of how to report them.
What is a disposal?
A disposal of an asset is deemed to have taken place if it is:
· given away as a gift (see below)
· transferred to someone else
· compensation is received for it (such as insurance if it has been destroyed)
Gifts are not always subject to Capital Gains Tax. For example, gifts to spouses (unless separated and not living together) or civil partners are exempt at the time of the gift. However, the spouse or civil partner may be subject to Capital Gains Tax if they later dispose of the property.
If an asset is gifted to a charity for no consideration, then there is also no Capital Gains Tax.
How to calculate a Capital Gain
There is an annual tax-free allowance which is currently £12,300 to which individuals are entitled. Companies are not eligible for this allowance.
To calculate the amount of capital gain, you will need to know:
A. The amount received for disposing of the property (or, in certain circumstances, the market value at the time of sale if you sold it for less than it was worth)
B. The costs of selling the property (for example estate agents’ fees and solicitors’ fees)
C. The amount originally paid for the property (see note 1)
D. The costs of any improvements (see note 2)
E. The incidental costs of buying and improving property (such as estate agents’ fees, solicitors’ fees, architect fees and stamp duty)
F. Calculation of any reliefs due (see note 3)
The capital gain is calculated as follows:
A – B = Net disposal proceeds C + D + E = Total cost of property
The total cost of the property is deducted from the net disposal proceeds to arrive at the net capital gain (before any reliefs). The gain is then reduced for any reliefs that are due (see note 3).
To explore this in greater depth, follow this link to HMRC's Capital Gains Tax calculator.
Following the introduction of Capital Gains Tax, rebasing provisions were introduced by Section 35, Taxation of Chargeable Gains Act (TCGA) 1992. Where property or land is disposed of that was owned on 31st March 1982, the original cost of that asset is replaced by the market value as of 31st March 1982.
For improvement costs to qualify under Section 38 TCGA 1992, those costs must have been expended for the purposes of enhancing the expenditure. The types of expenditure allowable would be extensions, loft conversions etc. Routine expenditure such as replacing windows, painting and decorating etc would be regarded as repairs and not allowable for Capital Gains Tax purposes.
If a property has been sold that has been previously used as a main residence, then private residence relief may be due under Sections 222 to 226 TCGA 1992. This allows relief for the period of ownership as well as providing a final period exemption.
Special rules for non-UK residents
There are special rules that apply to non-resident individuals who have residential property in the UK. The new rules also extend to disposals of non-residential UK property or land, mixed use property or land as well as rights to assets that derive at least 75% of their value from UK land.
The standard approach is for the cost of the property to be rebased as 5th April 2015 so that only Capital Gains Tax is chargeable on the increase in value from 6th April 2015 to the date it is disposed of.
To find out more, follow this link to HMRC’s online calculator.
How to report Capital Gains on residential property
Any such gains have to be reported to HMRC using a Capital Gains Tax on UK property account. An account with HMRC can be created via this link.
Penalties for late notifications of Capital Gains
If you fail to report your capital gain within the 60-day deadline outlined above, then you may be liable to the following penalties:
· Up to 6 months late - £100
· More than 6 months – a further £300 penalty or 5% of any tax due (whichever is greater)
· More than 12 months – a further £300 penalty or 5% of any tax due (whichever is greater)
Interaction with self-assessment
If you are required to complete a HMRC self-assessment return, then any capital gain that has arisen during the year still has to be reported on the relevant return.
Position for Companies
UK resident companies pay Corporation Tax on their gains as usual on their Corporation Tax return.
From 6th April 2019, non-resident companies pay Corporation Tax rather than Capital Gains Tax on gains from UK property. If the company doesn’t already submit a Corporation Tax return, it must register as a non-resident for Corporation Tax (see here.)