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.

What’s changing?

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 an accountant.

The ATT highlights how capital losses will be treated as a concern too. You could end up paying too much capital gains tax when making a payment on account. If capital losses are made later in the tax year, after already reporting and paying capital gains from a property, it could mean that the previous calculation, worked out using only the capital losses known about at the time, will turn out to be incorrect. Reclaiming any overpayments won’t be possible until the tax year has finished, which could leave you out of pocket for several months. Further capital losses after the disposal of a property will only be taken into account when disposing of another residential property in the same tax year.

Not everyone will be aware of the change in rules and how to follow them. Similar rules for reporting in the same tax year were introduced for non-residents disposing of UK property, many of whom didn’t realise that they should have reported disposals until they completed their self-assessment tax returns. HMRC conducted a consultation on how to roll out the changes, and ATT responded with the suggestion that penalties would have a “soft-landing” in the first few years of the new rules being paid out. They have also highlighted the risk of UK residents missing the deadline in the consultation on the new changes.

Stride said: “If the government wants to accelerate tax payments in order to minimise possible loss to the Exchequer, we would like to see a wider debate on the timing of payment of tax rather than payments on account being introduced in a piecemeal fashion over a number of different assets or income sources. A broader debate would enable HMRC to identify clearly the specific areas of concern and the risks to tax collection and thereby enable identification of possible solutions.”

Disposing of a former home

The new rules shouldn’t apply to you if you are selling your only or main home if you’re eligible for full private residence relief. This exempts you from paying capital gains tax. However, the rules are also changing for those who are disposing of a rental property that was once their home. Currently, private residence relief for landlords renting out their former homes can claim capital gains tax relief on property sales for up to 18 months after moving out. From April 2020, this will be reduced to nine months.

When disposing of a property that was formerly the landlord’s home, capital gains tax is only applied to the value that the property went up by in the period when the landlord wasn’t living there. While it’s currently possible to add another 18 months to this, it will be reduced to nine months from next year. It was previously cut from 36 months to 18 months in 2014.

For example, under the current rules, if you have owned your property for ten years and live in it for two years, you would pay capital gains taxed based on six and a half years of capital gains. This is the eight years you didn’t live in the property, less the 18 months current relief allowance. But if you were to dispose of a property with the same circumstances from April 2020, you will be taxed on seven years and three months of capital gains.

Under the new changes, there will also be changes to lettings relief. Landlords who sell their former home currently have up to £40,000 of their gains exempt from capital gains tax. This is per person, so it means that married couples can claim up to £80,000. However, the changes to capital gain tax rules will mean that this exemption only applies to landlords who still live in the property with their tenants. Absentee landlords will no longer qualify for this.

Recap of changes

Here’s a summary of how capital gains tax will be changing for landlords and others who need to pay capital gains tax from April 2020:

Disposals need to be reported and capital gains tax paid in the same tax year as a disposal – within 30 days of completing a sale
Final relief is reduced from 18 months to nine months
Lettings relief will only apply for any period when the landlord lived together with their tenants

Remember that if you sell your property before 6 April 2020, the current rules will apply. This means you can still benefit from the final 18-month relief and lettings relief, and any capital gains tax for the 2019/2020 tax year will not be due until 31 January 2021.

Get help with capital gains tax

The changes to capital gains tax that will be introduced next year could be confusing for landlords and those who own second homes. If you’re unsure how the new rules might affect you, getting help from an accountant will help you to ensure you stick to the law and pay the right amount of tax. An accountant can advise you on when could be the best time to sell based on how much capital gains tax you will need to pay and when you will need to pay it. If you are considering selling, now could be the right time to do it, before the new tax year arrives.

If you want to know more about the new capital gains tax rules or you need help, don’t hesitate to get in touch with one of our team members. We are happy to help with any questions.