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Capital Gains Tax: less time to settle liabilities

HM Revenue & Customs (HMRC) recently consulted on new rules associated with the payment of Capital Gains Tax (CGT) when disposing of residential property.

30 days to pay…

From April 2020, HMRC propose that when a residential or rental property is sold, or otherwise disposed of, a payment on account of CGT will need to be made within 30 days of completion of the disposal.

The proposed 30-day timeframe aligns with the current payment system for Stamp Duty Land Tax.

The tax authority is concerned that payment of CGT is, as it stands, not made soon enough following disposal and so the new rules are designed to ‘speed-up’ payments and minimise any loss to the Exchequer.

Who does it affect?

Changes to the payment of Capital Gains Tax will affect owners of second homes and buy-to-let landlords disposing of residential property.

Individuals selling their only or main residence should not be affected, provided that they are eligible for full private residence relief. If the gains are only partially eligible for private residence relief, a payment on account and return must still be made.

HMRC has also confirmed that the changes would apply to any overseas properties sold by UK residents – meaning that a payment on account would need to be calculated by the seller under these circumstances.

However, the rules do not apply if the gain on the disposal was taxed in the other country and double taxation relief was available, or the gain was taxed on the remittance basis.

Concerns about calculations and cash flow

Currently, where CGT is due, a disposal is typically reported to HMRC via a self-assessment tax return. The amount is then settled by 31 January following the tax year within which the disposal occurred.

Capital Gains Tax can be complex and it takes time to establish the facts and generate an accurate computation. However, under the new rules, sellers will have just 30 days to calculate, report and pay any CGT that is due.

Many industry professionals are worried that the proposals represent yet another tax compliance ‘burden’ to those affected, whilst others are concerned that the measures could have a negative impact upon sellers’ cash flow.

Sellers will need to ensure they have up-to-date records and sufficient funds to ensure they can meet their obligations within the 30-day window.

In light of such a drastic change to the deadline, The Association of Taxation Technicians (ATT) have called on HMRC to consider a ‘soft-landing’ approach initially.

There are also concerns about complications associated with ‘in year’ reporting and the treatment of capital losses.

‘In year’ reporting

‘In year’ reporting can create problems as many individuals will not know what rate of tax will apply at the time of disposal. This is because the relevant tax rate for CGT is dependent upon the individual’s total income for the tax year. This can only be estimated at the time of disposal.

Equally, other disposals may be made in the same year that are liable to CGT which might affect the individual’s position. Under these circumstances, after making an ‘in year’ report, individuals will need to review the computation at the end of the tax year. This can be done as part of their usual self-assessment procedures or via a new ‘end of year’ reconciliation process.

Capital losses

As per the current proposals, sellers will only be able to consider losses which are known about at the time of disposal. Should they incur further capital losses, later in the same tax year, then the original payment on account of CGT may be found to be too large. However, any overpayment cannot be reclaimed until after the tax year has finished.

The only time that capital losses realised after the disposal of the property can be taken into account is if the taxpayer disposes of further residential property in the same tax year.

How can we help?

Capital Gains Tax resulting from the disposal of property should always be carefully considered. Proactive planning is essential as timing can make all the difference to your resulting liability. For professional advice on this and other tax-related matters, please contact us today.

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