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Selling residential property? You may need to pay tax sooner than you think

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Since 2015, non-UK residents have had to report and pay capital gains tax (CGT) on UK residential property within 30 days of completion (extended to UK commercial property from April 2019). This caught many people out, with late filing penalties reaching £1,600 for those who have not kept themselves up-to-date with tax rules.

Despite these issues, HMRC are now extending the reporting to UK residents disposing of UK residential property from 6 April 2020 as they seek to accelerate receipt of tax payments.

Who needs to file a return?

The new rules require a standalone CGT return to be made to HMRC in the following circumstances:

• A UK residential property is disposed of by an individual, trustee or personal representative; and
• A gain arises on the disposal; and
• The date of exchange is on or after 6 April 2020.

Partnerships disposing of UK residential property will also be affected, as their partners are taxed on their share of gains as individuals. Therefore these partners will need to complete the CGT return.

When does a return not need to be filed?

For UK residents, a return only needs to be filed for disposals of UK residential property on which a gain arises. Commercial property is not included, and neither is non-UK residential property (although disposals of these will still need to be reported on Self Assessment tax returns). Where there is no gain then a standalone CGT return does not need to be filed, for example:

• The gain is fully covered by principal private residence relief;
• There is a loss on the disposal of UK residential property;
• The gain is covered by the annual exemption; or
• The gain is covered by capital losses prior to the UK residential property disposal;
• No CGT will be due because of EIS deferral relief (or similar), so long as conditions are met at the time of disposal (i.e. the EIS investment has already been made).

The rules for reporting disposals on Self Assessment tax returns remain the same, whether or not a standalone CGT return is filed. In particular, where a claim or election is made, this must be done via the Self Assessment tax return.

Be wary when disposing of main residences on which principal private residence relief is claimed, as this relief can be limited in certain circumstances. If the relief does not fully cover the gain then a CGT return will still need to be filed if there is CGT to pay.

When do the new rules apply from?

The rules apply for disposals on or after 6 April 2020. The disposal takes place when an unconditional contract is signed (or where a conditional contract becomes unconditional), which is generally the date of exchange. If the date of exchange occurs before 6 April 2020, then a CGT return is not required even if completion is on or after 6 April. There is a large incentive to exchange contracts before this date, as the following example illustrates:

Example 1: timing of payment
John is selling a buy-to-let property, on which there is a gain of £200,000.

If he exchanges on 4 April 2020 and completes on 20 April, the gain occurs in the 2019/20 tax year and tax will be due on 31 January 2021.

If he exchanges on 10 April 2020 and completes on 20 April, the gain occurs in the 2020/21 tax year and the tax will be due on 19 May 2020, bringing forward the payment date by over 7 months.

However, it could still be advantageous for John to exchange on 10 April, if he will crystallise capital losses in the 2020/21 tax year (see example 3).

When does the return need to be filed by?

The CGT return must be made within 30 days of completion (rather than exchange, which remains the tax point in the majority of circumstances), with payment due by the same deadline. Both late filing and late payment will result in penalties, which are the same as for Self Assessment tax returns. A CGT return must be made even if the individual already submits tax returns.

Where there is a gap of many months between exchange and completion, and a Self Assessment tax return reporting the gain is filed within 30 days of completion, then a CGT return is not required. For example:

Example 2: delayed completion
Jane is selling her holiday home in Cornwall, realising a gain of £60,000. She exchanges on 23 December 2020, but completion is delayed until 3 June 2021.

Jane files her Self Assessment tax return on 20 May 2021, prior to completion. She reports the gain on the holiday home on this, so a standalone CGT return is not required. The CGT is payable on 31 January 2022, rather than 3 July 2021.

How do I file a return?

In order to make the return, an individual will need to sign up to HMRC online services and apply for a CGT account (to be made available on 6 April 2020). Those completing their own tax returns will already have an HMRC online account, but those who do not will need to factor in the time it takes to do this. Tax agents can submit returns on behalf of their clients, but HMRC have confirmed that taxpayers will still need to set up a CGT account and then provide a reference number to their agents to enable them to file on their behalf through the agent portal.

How much tax is payable?

The tax rate on gains on residential properties is 18% for basic rate taxpayers (until the basic rate is used up) and 28% for higher and additional rate taxpayers (and trustees and personal representatives). Up until now, capital gains have been reported alongside income, creating certainty of which CGT rates should be used. Presumably HMRC will request an estimate of income on the standalone CGT return, but this is yet to be confirmed.

In addition, other gains and losses in the year (e.g. on an investment portfolio) are pooled with residential property gains when calculating the overall CGT due for a given year. Where losses are incurred before a residential property gain, these can be taken into account on the CGT return. However, where losses are incurred after a residential property gain, these cannot be taken into account (unless they are UK residential losses). Instead, such losses must be claimed on the Self Assessment tax return for the year, which will lead to a repayment of tax. This is best illustrated with an example:

Example 3: timing of losses
We return to our example of John, who is selling a buy-to-let property standing at a gain of £200,000. He has capital losses in the 2020/21 tax year, so decided to exchange on 10 April 2020 and complete on 20 April 2020.

His losses are:

1. 7 April 2020: capital loss on sale of shares of £20,000.
2. 10 May 2020: capital loss on sale of commercial unit of £50,000.
3. 23 October 2020: capital loss on sale of residential property of £30,000.

John is a higher rate taxpayer, and has an annual exempt amount of £12,500 in the 2020/21 tax year. His tax is as follows:

1. The losses on the shares were incurred before the residential property gain, so can be taken into account on the CGT return required by 19 May 2020. This gives tax due on 19 May 2020 of £46,900 (being £200,000 gain less losses of £20,000 and exempt amount of £12,500 at 28%).

2. The capital loss on the sale of the commercial unit cannot be taken into account until the Self Assessment tax return is filed.

3. A CGT return is not required for the capital loss on the residential property exchanged on 23 October 2020, but one can be filed to claim tax back of £8,400 (being £30,000 at 28%).

When John files his Self Assessment tax return, his overall CGT is £24,500. He has paid £46,900 and been refunded £8,400, giving a repayment of £14,000 (the £50,000 loss on the commercial property at 28%). The earliest he can get this refund is 6 April 2021.

What if I don’t have the necessary information?

It pays to plan ahead, rather than wait until completion. Keep information on acquisition costs and enhancement expenditure on file, so that the tight timescales can be met. However, where information is not available, the rules allow for estimates to be made. These can then be updated with actual figures either by amending the CGT return or through the Self Assessment tax return.

What about non-UK residents?

There are similarities and differences with the position for non-UK residents as compared to UK residents:

Similarities:

• Non-UK residents will be required to use the new system (including setting up an HMRC online account).
• Non-UK residents must pay CGT within 30 days (i.e. they will lose the option to defer payment).

Differences:

• Non-UK residents must report all disposals, whether or not a taxable gain arises.
• Non-UK residents must report disposals of UK commercial property as well as residential.
• Non-UK residents must report indirect disposals of UK land and property via a “property rich entity”.

Planning points

The new rules are likely to catch many people unawares and may lead to cashflow issues for some. These may be alleviated by:

• Exchange before 6 April 2020 to delay the payment of CGT, unless it is otherwise disadvantageous.
• Crystallise losses before making UK residential property gains, where possible.
• Where claiming EIS or SEIS relief, make the investments before completion.
• If completion is delayed beyond the end of the tax year, file a Self Assessment return within 30 days of completion to delay payment of CGT.

 

CGT rates have changed since this article was written and more up to date information can be found in our 2024 Spring Budget response.

CGT for Non-Residents – to Value or not to Value

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For as long as I have been working in the tax profession, arguably the two best pieces of basic CGT planning have been death and becoming non-resident.  I remember in my formative years as a Tax Adviser being somewhat shocked and, admittedly, envious of a client who had emigrated to Australia.  In the following tax year they managed to sell a number of properties free of capital gains tax.  The simple reason – they became non-resident in the previous tax year and would remain outside the UK for at least five tax years.

From 6 April 2015 the purge on non-residents continues with offshore based individuals owning UK residential property now having to fall in line with those who have not been able to negate their gains by emigrating to some exotic destination.  Simply put, non-residents will pay capital gains tax on sales of UK residential property.

Unlike the recently introduced Annual Tax on Enveloped Dwellings, there are no valuation bands determining the charge to be paid and aside from main residence relief, there is no relief available from the charge.  The rate of tax for non-resident individuals will be the same as for their UK counterparts, being 18% if the gain falls within the basic rate of tax and 28% if any part lands in the higher rate.

Fortunately, the new rules are not retroactive so the news that a non-resident can re-base the value of their property as at 5 April 2015 has been welcomed.  This may sound fairly straightforward but perhaps the biggest dilemma facing overseas UK residential property owners will be the question – ‘should I re-base’ and then having decided to do so, ‘should I obtain a valuation’.

There will be three options available to a non-resident for a future sale of their UK residential property:-

  1. The default position is that the individual’s property is revalued as at 5 April 2015 and only the increase in value from 5 April to the date of sale is charged to capital gains tax on sale. This is the basic default position and it will involve revaluing the property.  A disposal could be many years into the future when the value at 5 April 2015 has been long forgotten.
  2. An election is made so that the whole gain from purchase is calculated, as you would normally do with a UK resident, but once that gain is established, it is then apportioned on a days basis between pre and post 5 April 2015 periods, with only the post April 2015 pro-rated gain being charged to capital gains tax. No valuation would be required here.
  3. The taxpayer elects to tax the gain for the whole period of ownership with no re-basing and no splitting the gain pre and post 5 April 2015. Clearly, this would only be worthwhile if there is a loss accruing.  Again, no revaluation would be required here.

The easiest options in terms of administrative burden and cost are options 2 and 3 above but what if the non-resident taxpayer does not opt out of the default position in option 1?

Perhaps one of the most common enquiries raised by HMRC on the sale of land and buildings is where the value of a property entered within a Tax Return is disputed.  This can happen even where there has been a professional valuation undertaken.  These enquiries usually involve the District Valuation expert entering into negotiations with the professional Valuer employed by the taxpayer.  Under these circumstances the client and Tax Adviser are able to sit back and wait for the negotiations to be concluded.

But what happens where a formal valuation has not been undertaken?

The Revenue make it clear in their responses to ‘frequently asked questions’ published on 18 March 2015 that it is the ‘taxpayer’s responsibility to accurately value the property’.  Although the Revenue state that they do not necessarily expect the taxpayer to make the valuation on or around the 5 April 2015 re-basing date, they advocate making notes as to the general condition of the property for future reference.  We would go further and suggest that photographs are kept of the site and a record kept of the published sales prices of similar properties in the area.

One option alluded to by HMRC in the guidance is their post transaction valuation review process, which enables taxpayers to agree a value with the Revenue after a disposal has taken place but before a Return disclosing the transaction is submitted.  This could be an attractive proposition for those non-residents already within the Self-Assessment regime.  If a property is sold on, say, 1 May 2015, the Return declaring that disposal is not due to be filed until 31 January 2017 so a post-valuation request could realistically be made.  It should be noted that the ICAEW (the regulatory body governing accountancy practices) have recently reported significant delays in processing these requests so it may be sensible to factor in sufficient time for the process to conclude.

However, if a non-resident is not within Self-Assessment, the current proposal is that they should submit a Non-Resident CGT Return within 30 days of the completion date.  If my mathematics is correct, a post transaction valuation request would not work here because HMRC clearly state within the notes accompany the valuation request form (CG34) that it must reach them at least two months before the filing date.  This is slightly worrying!

Consequently, the non-resident property owner who is not within Self-Assessment could face some serious problems later on down the line when they come to sell.  Without a professional valuation and no detailed knowledge of the UK property market, a non-resident could be in the unenviable position of having an enquiry that extends for several years with significant professional costs and an unexpected tax bill.

It is not unusual for an enquiry on valuation matters to rumble on for several years and the outcome is not always favourable.  Our recommendation is that a contemporaneous valuation is obtained from a professional valuer.  The cost of a professional valuation now may well be a small price to pay for greater certainty in the future.

If you are affected by the new rules and would like advice, please contact one of the tax team who will only be too happy to assist. We can also introduce you to a professional valuation expert if required.

 

CGT rates have changed since this article was written and more up to date information can be found in our 2024 Spring Budget response.

What are the changes to Annual Tax on Enveloped Dwellings (ATED)?

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Following a greater than expected tax yield from the introduction of the ATED (Annual Tax on Enveloped Dwellings), HMRC have decided to widen the net over the next two years. Originally, the ATED charge for holding UK residential property within a corporate structure was aimed at those individuals sheltering properties worth in excess of £2,000,000 from Stamp Duty Land Tax. However, HMRC have decided to introduce the following new bandings (with annual charges adjacent):-

Value of Property Charge
£1,000,000 to £2,000,000 £7,000
£500,000 to £1,000,000 £3,500

The higher banding is operative for the ATED period 1 April 2015 to 31 March 2016, whilst the lower banding will start for the ATED period 1 April 2016 to 31 March 2017.

For both new bandings there will be transitional rules, as HMRC accepts that there may be some delay due to a lack of awareness of the changes. The usual and transitional submission/payment dates for the period 1 April 2015 to 31 March 2016 are shown below:-

Properties in Excess of £2,000,000 (Usual):-
Submission Deadline 30 April 2015
Payment Deadline 30 April 2015

Properties valued between £1,000,000 and £2,000,000 (Transitional):-
Submission Deadline 1 October 2015
Payment Deadline 31 October 2015

Whilst the changes noted above will clearly result in many additional properties being caught, further bad news has come in the form of inflation busting tax increases of around 50%.

For example, a corporate owning a property worth £2,100,000 can now expect to pay a charge of £23,350, an increase of £7,950 on the previous year. The greater the value of the property, the bigger the tax increase. From 1 April 2014, the annual chargeable amounts are being increased in line with the CPI (Consumer Prices Index).

One saving grace is the opportunity to claim relief in certain circumstances. Probably the most common reliefs are where the property is let on a commercial basis or held for development purposes. However, the relief still needs to be claimed through an ATED Return due by 30 April 2015 (or 1 October 2015 for the new banding). Failure to submit a Return and claim relief can result in penalties of at least £1,300 by the time the Return is six months overdue. The penalties are set out below:-

Initial Late Filing Penalty – £100
After 3 Months – £10 Per Day (up to a maximum of £900)
After 6 Months – £300 or 5% of the tax due (higher of)
After 12 Months – £300 or 5% of the tax due (higher of)

Whilst on the subject of relief, where a property is let to a connected party (spouse, child or lineal descendant of the corporate shareholder), no relief can be granted.

Although HMRC do allow taxpayers to Self-Assess the value of their properties for ATED purposes, it should be noted that if HMRC challenge and the value proves to be incorrect, penalties can be levied. The penalty regime is the same as that used for Self-Assessment and other taxes (Schedule 24 FA 2007 & Schedule 55 FA 2009).

For existing ATED payers, a value should have been ascribed as at 1 April 2012. For properties purchased after that date, the value used is the purchase price. HMRC have stipulated that the values need to be reassessed every five years so 1 April 2017 will be the next applicable valuation date. If a property has been purchased during the period between valuation dates, there will still be a requirement to reassess the value at the next main revaluation date. For example, a property bought on 1 April 2015 will need to be revalued on 1 April 2017 and not five years after the date of purchase.

You may also like to refer to Cetin Suleyman’s blog, which touched on many of the issues raised above.

It’s not just World Cup games that end in penalties – The Annual Tax on Enveloped Dwellings (ATED) Returns could lead to a few too!

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So another World Cup match ends in penalties with the Netherlands suffering the curse of the English in last night’s game against Argentina, and I suppose it was almost inevitable that both teams would play a cat and mouse game after seeing what Joachim Low’s men did to both Brazil’s national team and its national pride the previous night.

And I can’t help thinking that penalties (of the fiscal kind) will be another inevitability for the future given the UK Government’s recent announcements to “Low”er (Sorry, I couldn’t resist that) the threshold for reporting Enveloped Dwellings from £2,000,000 to £500,000.  This is part of the relatively new Annual Tax on Enveloped Dwellings regime (“ATED”)

In outline terms, the ATED rules require that high value residential property held within a corporate (or non-natural person) structure will be subject to a number of measures to combat anti-avoidance.  These range from a higher rate of Stamp Duty Land Tax (SDLT) (15%) to the Annual Tax itself, assessed by reference to the valuation band in which the property sits.

In fact, “assessed” is the wrong word to use here because the ATED tax is actually based on self-assessment.  It is up to the taxpayer, in this case most likely the property owner, to assess their liability and submit a return accordingly.  Now the vast majority of my clients will be eligible for one of the various reliefs on the basis that they are either letting the property or developing it for resale, so does that get them off the hook?

Well, yes and no.  Whilst they’ll have no tax liability they still have an obligation to file the return and that’s where penalties could come into play.  Furthermore, the return appears at first glance to be an annual return but there is in fact an additional obligation to submit an ATED return 30 days after acquiring an eligible property, or 90 days after the creation of a new property.  It’s worth adding at this point that a separate ATED Return must be completed for each individual Enveloped Property.

So back to penalties.  The ATED penalty regime is heavy – a £100 fixed penalty for being late by a day, followed by a £10 per day fine for each of the next 90 days and then a further £300 once 6 months have passed and so on.

But let’s be practical, Enveloped Properties valued at over £2m are not that common and so one could say that at present the non-compliance risk for developers and investors, who let’s face it have a myriad of other things to contend with when acquiring properties or completing developments, is not so great.

However, next year the £2m threshold falls to £1m, and the year after it falls to £500,000.  This gives an exponential increase in the number of ATED returns required, and inevitably an increase in the number of property owners falling foul of their filing obligations

And, just like all World Cup games that end up in penalties, it will seem very unfair to those on the receiving end.

 

Tax on high value residential property

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On 31 January 2013 the long expected draft legislation on the taxation of high value residential property was released. Properties are high value if they are worth more than £2 million.

Modern Apartment Balcony with Wooden Decking

The draft legislation covers the 15% stamp duty land tax charge that has applied to the acquisition of high value residential property since Spring 2012 and it confirms proposals for the Annual Residential Property Tax (ARPT) that will apply from 6 April 2013. In addition there are changes to the capital gains tax regime from 6 April 2013.

The legislation applies to “non-natural persons” which includes companies and partnerships (if one or more of the partners is a company). Trusts are excluded from this legislation.  Also excluded are genuine businesses carrying on a genuine commercial activity such as property rental or development and properties owned by charities for charitable purposes.
Stamp Duty Land Tax

Non-natural persons who purchase high value residential property have been subject to a 15% SDLT rate since March 2012.  Although the draft legislation confirms this proposal it also provides relief against the charge for genuine businesses carrying on a genuine commercial activity.  Those entities would be subject to a 7% rate of SDLT.
Annual Residential Property Tax (ARPT)

Non-natural persons who hold UK residential property valued at more than £2m on certain specified dates will pay ARPT of between £15,000 and £140,000, depending on the value of the property.  The £15,000 charge applies to properties whose value is between £2m and £5m.  The measure takes effect from 1 April 2013 and the annual tax is payable on 31 October 2013 for 2013/14 and  on 30 April for each subsequent year.

The amount of the ARPT will increase every year on an index-linked basis.  The value bands will not be adjusted for inflation.  Residential properties within the charge will need to be revalued every five years.
Capital Gains Tax

Capital Gains Tax will be chargeable on both UK and non-UK non-natural persons when they dispose of interest in high value residential property that is subject to ARPT.  Capital Gains Tax will apply to disposals on or after 6 April 2013 at a rate of 28%.  The tax will only apply to increases in value of the property from 6 April 2013.  This therefore rebases the property values to that date.  Current indications are that the 28% will be subject to a form of taper relief where the property is just over the £2m mark.  This is to prevent distortion in the property market for properties worth marginally more than £2m.

Taxation at a 28% rate is higher than the standard corporation tax rate for UK companies. It is felt that very few UK companies will fall into the ARPT charge and therefore the impact of this tax anomaly is believed to be minimal.

The draft proposals permit the sale of offshore companies which hold high value residential property to remain free of UK Capital Gains Tax. However the purchaser of the company shares will inherit the Capital Gains Tax base cost of the property which is owned by the company. This may lead to considerable Capital Gains Tax at a future time if the property was sold by the company.

 

Conclusion

The impact of the proposals is to provide a disincentive for future purchases of high value residential property to be made using a wrapper such as an offshore company. The disincentive is the 15% rate of stamp duty land tax and the ARPT, whose minimum annual charge is £15,000.

Non UK owners of existing structures will need to weigh up the cost of the ARPT compared to the possible saving of capital gains tax by sale of the wrapper free of CGT.   There is also protection against UK Inheritance (Death) Tax by holding high value property in offshore structures. Owning properties in these wrappers is not just for tax reasons.  For example, some individuals hold them in offshore companies for privacy reasons.

If an existing structure is going to be caught be the new provisions then consideration should be given to restructuring the way property is owned before 1 April 2013.