Paraplanning: capital gains tax on sales of residential property

17 March, 2021Gerry Brown

Capital gains tax is complicated, especially when related to sales of residential property in the UK. Gerry Brown looks at when, how and what to report within the 30-day time limit.

What are the capital gains tax reporting rules on sales of property?

housesOn 6 April 2020, new rules were introduced on how UK residents report capital gains on residential property situated in the UK.

These rules imposed reporting requirements on those selling residential property, but did not change the way that capital gains are to be calculated.

The key aspect of the new regime is that gains must be reported and the relevant tax paid within 30 days of the disposal. In general a disposal takes place when contracts are exchanged.

The report must be made in a specific online format using a ‘capital gains tax on UK property account’ under a government gateway user ID.

HMRC will then send the client a letter or email giving a payment reference number and instructions as to payment.

When to report capital gains on residential property?

The client does not need to report a gain if there is no tax to pay.

Perhaps the gain is less than the capital gains tax annual exemption, which is £12,300 for 2020/21 and 2021/22. Or maybe a relief – such as main residence relief – is available.

If there is a gain, tax will be levied at:

  • 18% for basic rate taxpayers, or
  • 28% for higher or additional rate taxpayers.

The reporting requirement applies only to UK properties, but if your client has a property abroad, it will have to be reported in their self-assessment.

What does ‘residential property’ mean for tax purposes?

Residential property means “an interest in land” that, at any time, includes a dwelling.

Typical instances of residential property gain in the scope of the new reporting rules would be:

  • an investment property – eg, a buy-to-let property
  • a holiday home.

Disposals of land or commercial buildings are outside the scope of the new reporting regime. However, you should, of course, make sure your client reports them in their self-assessment.

What happens if your client misses the 30-day time limit for reporting?

If the client fails to report the gain and pay the tax within the 30-day time limit, they may be liable to a penalty and charged interest from when the payment was due.

The initial penalty has been set at £100. However, continuing failure to report and pay will incur further penalties.

Where else does the client need to report capital gains?

Gifts of residential property – perhaps to children – are disposals for capital gains tax purposes and so may require a ’30-day report’.

If your client normally submits a self-assessment then details of the gain should also be included in that return.

However, your client doesn’t need to submit a self-assessment if the capital gains has been reported in the 30-day report – unless of course there are other reasons to submit one.

What if there’s a delay in calculating the capital gain?

There may be a delay because of a lack of detailed information. Perhaps a formal valuation is required.

In this situation, a provisional gain calculation should be made, a report made on that basis, and the tax shown by the provisional valuation paid.

As soon as accurate figures are available, make sure an amended calculation is submitted to HM Revenue & Customs (HMRC) .

What if the client isn’t a UK resident?

From 5 April 2020, non-UK residents have been required to report and pay tax on gains from their UK residential properties. Again, they should use a ‘capital gains tax on UK property account’ under a government gateway user ID.

As for UK residents, there’s a 30-day report and pay time limit with a penalty regime for late compliance and interest is levied on late payments.

The gain is calculated in one of three ways, by:

  • substituting for the original cost, the market value at 5 April 2015
  • working out the gain over the whole period of ownership and then calculating the proportion of the gain that has accrued since 5 April 2015 (time-apportionment)
  • working out the gain over the whole period.

The client can choose which method to adopt. Method (c) will be appropriate if a loss has been suffered.

You should investigate the availability of double taxation relief – if the client has paid tax in their ‘home’ country – and specialist advice is essential.

Gerry Brown
Gerry Brown is a Consultant at QB Partners. He began his professional career as an inspector of taxes and later qualified as a chartered accountant. He’s worked at a number of financial services companies providing technical support and contributes to our Diploma in Paraplanning (DipPP).

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