HM Revenue and Customs (HMRC) is set to change the capital gains tax (CGT) rules that apply to second properties, starting from April 2020.
Under current rules, homeowners can report or pay CGT on property disposals until the deadline for submitting a self-assessment form, which is set at up to 22 months after the disposal took place.
However, HMRC’s updated rules will encompass properties both in the UK and overseas, and taxpayers will only have a 30-day window to notify the Revenue and make an advance payment towards their CGT bill.
“[The rules] will not apply where the gains are not chargeable to CGT – for example, where the gains are covered by private residence relief,” HMRC said.
Private residence relief is only applicable if the property being sold is the taxpayer’s main residence – meaning the individual has lived there throughout the whole ownership period.
Is 30 days enough time?
Hilesh Chavda, legal tax specialist at law firm Royds Withy King, described the change as “dramatic”.
He told International Adviser: “This is a marked change from the current position. At the moment, the CGT deadline is 31 January following the end of the year in which the sale was made.
“Where CGT is due, the change will mean that sellers have to get funds in place to cover the CGT liability before the sale is completed, as 30 days is not very long at all.
“This could be a particular issue where there are large historic gains. Landlords, investors and second home owners thinking of selling one or more properties in the next couple of years are well advised to get professional advice at an early stage to make sure they understand and can meet their liabilities.
“This will, no doubt, impact cash flow so it will be interesting to see what effect this has on the market. This is particularly true where sellers are also buying and have to pay stamp duty land tax within 30 days of completion.
“Many may well be tempted to offload any surplus or underperforming properties in advance of April but whether they can do this successfully or not in today’s supressed market remains to be seen. This change will not affect sales where no CGT is due, for example where there is a principal private residence relief claim.”
‘No obvious reason’
Akin Coker, partner and head of private client team at consultancy firm Buzzacott, told IA that there seems to be no apparent reason as to why HMRC changed the current CGT rules.
“There may be a rude shock awaiting non-resident property owners disposing of residential property after April 2020.
“The main driver for this was the need to develop a framework for collecting tax that would, otherwise, have been quite difficult to collect where the proceeds are paid out in full to non-resident property owners.
“There is no obvious reason why this has been extended to UK resident property owners as well – as this system didn’t need ‘fixing’. However, it is consistent with HMRC’S objective of raising more tax revenue and collecting the revenue sooner.
“From a practical perspective, 30 days does not really allow much time to collate all the relevant information to prepare capital gains computations, which can be quite complicated in some cases, so it remains to be seen how property owners will cope with this.”
Taxman needs to be clearer
HMRC’s consultation on the changes revealed that the majority of those who read it found the document too difficult to understand, with too much “jargon”.
They warned that the changes would not make any sense to non-professionals.
“An awareness campaign and more education are therefore required so that people are fully aware of how and when they need to pay CGT in this instance, especially for people doing it by themselves,” Rachael Griffin, tax and financial planning expert at Quilter, told IA.
She warned that the time crunch would only make it even more difficult for people to get the right information on what they need to pay.
“Massively reducing the length of time you can pay the capital gains tax on residential property to 30 days is intended to increase the amount of people who pay tax but could have the opposite impact,” she said.
This is something Sangna Chauhan, partner at law firm Charles Russell Speechlys, agrees with.
She told IA: “HMRC has a significant education job to do before April 2020 to ensure that this policy works.
“Having learned lessons from the introduction of non-resident CGT in 2015 – where a number of late payment penalties were overturned at tribunal because of a lack of transparency – HMRC has commissioned research into how best to communicate the new payment deadline to taxpayers.”
Advisers to the rescue
Considering the great reduction in the timeline, both Griffin and Chauhan highlighted the importance of turning to a financial adviser.
“Often, clients will only find out about the payment deadline from their advisers. Once again, this could mean that HMRC are relying on professional advisers to ‘educate’ taxpayers,” Chauhan added.
Similarly, Griffin said: “These kind of changes provide financial advisers with an opportunity to add value to their advice by educating clients and helping them navigate a complex tax system.
“Advisers are therefore perfectly positioned to help with the process and make sure people are paying the correct amount of tax and avoid any penalties.”
