New rules from HMRC will mean that buy-to-let landlords and second homeowners will have to make capital gains tax payments sooner than they might have expected, says the Association of Taxation Technicians (ATT). If you are planning to sell a property that you have let or a second home, it would normally need to be reported to HMRC using a self-assessment tax return or using the online “real time” tool for reporting. This means that the tax due needs to be paid by January 31 of the following tax year, which gives sellers between 10 and 22 months after the sale of their property before they need to pay.
HMRC has concerns about how long it could take before capital gains tax is paid, so they have decided to change the rules from April 2020. From the 2020/21 tax year, individuals and trustees disposing of a residential property will be required to make a payment on account, much like the rule for self-assessment income tax. This payment will need to be made within 30 days of the sale of the property. If you’re planning on selling, you’ll need to calculate and report the capital gains tax that you think is due and pay within the 30 days.
In the 2019/2020 tax year, any capital gains tax due after the completion of a residential property sale isn’t due until January 31, 2021. The individual or trust can make payments on account before that date, but they are not required to pay the full amount until January 2021. From 6 April 2020, the individual or trust will have 30 days to report their capital gains tax due and pay what they owe. For example, if the sale is completed June 12, the reporting and the payment would need to be completed by July 12. This means that the payment will need to be made a lot earlier than it would for sales in the 2019/20 tax year, and will be due before any capital gains tax for the 19/20 tax year is due.
Capital gains tax on residential property
The amount of capital gains tax charged depends on the income tax rate of the payer. If you pay the basic income tax rate, you will pay 18% on residential property (or 10% for other gains) if your taxable income plus your taxable gains, less your tax-free allowance, is within the basic income tax band. You pay 28% on anything over that or 20% for gains from assets other than residential property. UK-wide income tax rates determine the higher rate for Scottish taxpayers. These rates are paid after the capital gains tax allowance has been used up, of £12,000 for individuals or £6,000 for trusts.
Potential confusion from new rules
John Stride, Technical Steering Group Co-Chair for ATT, said that the proposals could create confusion due to people not understanding which rate of tax will apply. In addition to selling property, individuals might make other disposals in the same tax year, which could affect what they pay. After you have made a report during the tax year, you will need to revisit your numbers at the end of the year. You can do this through self-assessment or by using the new “end of year” reconciliation process. This means that complying with capital gains tax and other taxes is slightly more complicated, and you might wish for extra help from your accountant. Allen Tomas & Co can make referrals in this area where there is no active Accountant.