Changes to Capital Gains Tax rules - what you need to know now
If your business represents and acts on behalf of owners of UK property, you will need to be aware of a big change in the Capital Gains Tax rules applying to the direct disposal of UK property that are due to come in after 6th April 2020. The changes are likely to catch people unawares and if the rules aren’t followed, the seller could face interest on the unpaid tax as well as other financial penalties.
What are the main changes?
The Capital Gains Tax (CGT) regime for non-UK resident individuals has been extended since 6th April 2019 to include commercial property and indirect disposals. An indirect disposal is when a non-UK resident makes a disposal of a ‘property rich company’ in which they hold a substantial indirect interest. The Annual Tax on Enveloped Dwellings CGT was abolished, with companies now subject to corporation tax rates instead.
From 6th April 2020, the payment for CGT due on disposals of UK property will be accelerated
for both UK residents and non-UK residents.
The legislation bringing in the changes can be difficult to interpret and apply in practice. Your clients will therefore need guidance on how the changes will affect them and what steps they need to take in order to be fully prepared. If you are not fully conversant with the UK tax regime, it would be a good idea to consult an expert before giving advice to your clients. This will protect both you and them.
When will a Capital Gains Tax return be required?
From 6th April 2019, non-UK residents have had to file a CGT tax return whenever there has been a disposal of UK land, whether directly or indirectly and regardless of whether a gain or loss is realised.
From 6th April 2020, UK residents will also be required to file a digital CGT return when a direct disposal of UK residential property has been made, realising a gain.
In both cases, the CGT returns need to be filed within 30 days of the completion date of the sale. There are concerns that this will not provide taxpayers with enough time to prepare the calculations. The one advantage to this is that taxpayers will no longer need to register for self-assessment just to report a disposal of UK land and property as the CGT return will be sufficient. Companies will need to file a corporation tax return in line with their usual deadline.
Payments of Tax
Along with the CGT return being filed within 30 days, the payment of the CGT is also due on the ‘notional amount’ charged. However, until 5th April 2020, non-UK residents can continue to defer payment where a self-assessment tax return is filed.
Estimates of an individual’s income will be required in order to work out the CGT rate applicable and amendments may be submitted if the estimates are incorrect. This may, however, add to the professional fees charged for amending the return.
If more than one CGT return is filed in a tax year, the notional CGT will need to be recalculated each time and compared with the payments already made.
What properties will the changes affect?
The changes do not apply on the sale of a person’s main residence so it will mainly affect those who are selling second properties. This is something that property businesses need to be aware of, and – more importantly – be preparing their clients for.
The time limits for payment of CGT have reduced significantly and sellers need to be aware of this and what they need to do in order to remain compliant and avoid penalties.
Some taxpayers may experience cashflow issues, as the CGT will need to be paid earlier than under self-assessment and they may not have budgeted for this. Allowable losses may be incurred after completion and these can only be claimed in a subsequent CGT return.
Principle Private Residence Relief
From 6th April 2020, the government are consulting to reduce the final period of exemption for Principle Private Residence Relief (PPR) from 18 months to 9 months, in line with the changes in 2014 which reduced it from 36 months to 18 months. This would apply to properties that have had some owner occupation.
The change is being introduced in order to tackle the perceived exploitation of the rules which allow an individual to accrue PPR on a second dwelling for the same period.
The government are also looking to change the way letting relief operates so that it will only apply to the period where the owner is in occupation with the tenant, even for periods prior to April 2020. These changes will coincide with the changes to the reporting rules already mentioned in this article.
If, after reading this article, you’re concerned about the effect of new tax changes on your clients, why not talk to our rradarstation advisors? rradarstation is a resource available through the AXA MLP where policyholders can access rradar’s legal advisory team over the phone or by email and web gateway that provides over 2,000 articles, step-by-step guidance sheets, forms, sample letters and templates to download relating to running your business/organisation.