Individual landlords renting out residential property have to comply with a very stringent tax regime at present. Gravita’s Tax Consultant, Tim Palmer, reviews the position.
They have to disallow their buy to let loan interest for higher rate income tax purposes. They can only claim relief when they replace the furniture and they have to pay an extra 3% stamp duty land tax supplement when they acquire a residential property ‘to be rented’.
However, perhaps the worst tax area of all for them is their capital gains tax (CGT) liability and reporting requirements.
An individual (not a company) but also trustees and personal representatives who sell a residential property on which CGT is payable, because the gain is not covered by Main Residence Relief and the CGT exemption, must report the gain and pay the CGT due within 60 calendar days of the completion of the sale of the property.
It should also be noted that the rates of CGT, normally 10% for basic rate income tax payers and 20% for higher rate tax payers, are 8% higher on such gains.
The CGT rates payable are very much dependent on the individual’s income tax position.
Example
Brian is a self-employed carpet salesman. His taxable income for 2023/24, after all allowable tax deductions and his personal income tax allowance, is £30,700.
Brian sold a rented flat in July 2023 and made a capital gain of £41,000. After deducting the CGT annual exemption of £6,000, his chargeable gain was £35,000.
Brian’s income of £30,700 is £7,000 short of the £37,700 2023/24 basic rate income tax band.
Accordingly, £7,000 of the gain on the flat will be taxed at 18% and the remaining £28,000 will be taxed at 28%.
This new regime only applies to residential property, not commercial. The relevant tax legislation is contained within Schedule 2, Finance Act 2019. You only have to pay and file a ‘CGT on UK property return’ within 60 days of completion if CGT is actually payable on the gain. If no CGT is due, then no CGT pay and file is required. However, non-UK residents must declare disposals under the new regime, regardless of whether a chargeable gain arises or not.
The client has to open up a new ‘property account’ to report the capital gain, using the CGT on UK property service. This will mainly affect UK individual landlords selling UK buy to let houses and flats. If a landlord sells 7 rental properties in the year and makes gains on each one, on which CGT is payable, he has to submit 7 separate ‘in-year’ Capital Gains Tax on UK Property returns!
There will be penalties for late filing and interest for late payment of CGT.
This new CGT reporting regime is in addition to declaring the gain on the normal self-assessment yearly tax return, not instead of.
Taxing the Gain
The gain is taxable in the fiscal year in which you exchanged contracts to sell the property, despite the reporting being required 60 days after completion.
The order of submission
With one exception (see later), the submission of the self-assessment tax return does not displace the requirement to submit a property return.
If a property return is required to be submitted, it must be filed before the self-assessment tax return.
Once the self-assessment tax return has been filed, HMRC’s systems will indeed block access to the online CGT on UK property service.
If the residential property is held jointly, each owner is required to make their own CGT return i.e. husbands and wives one each. They might also have different CGT rates! This new regime is aimed at the owners of the property, not the property itself.
Capital gains arising on overseas properties are not part of this new regime.
The new 60 day CGT regime could also apply to a sale of a residential property following a gift, a transfer in or out of a trust if a CGT holdover relief claim has not been made, or a transfer as part of a divorce settlement.
Reporting of the gain could also be required when a change in the profit sharing ratio in a partnership triggers a gain.
Estimates
Generally, you have to be very careful with estimates included in the ‘CGT on UK property’ return. If the estimates have been found to be ‘unreasonably low’, when the actual figures are substituted, HMRC will charge interest from 60 days after completion until the full CGT is paid.
You must tick the ‘estimate’ box if indeed any estimates have been made. If you do not tick it and more CGT turns out to be payable, HMRC will charge interest, even if the estimate was not ‘unreasonably low’.
It is also the client’s responsibility to eventually amend the estimated figures. HMRC will not send out reminders to revise the estimate.
When the self-assessment tax return alone will suffice
There is a very good opportunity when it is possible to file a self-assessment tax return and remove the requirement completely to submit a CGT on UK property return.
If you can manage to do this, it also results in the CGT not needing to be paid until the normal 31st January payment deadline (i.e. much later)!
To do this, the taxpayer must file his self-assessment tax return within 60 days from the date of completing the sale of the property. If you do this, you will displace the need to submit a property return.
Example
Fred sells his rental flat, within an unconditional exchange on 23rd March 2024. The gain will therefore be taxed in the fiscal year 2023/24. He completes the sale of the flat on 20th May 2024. So long as Fred files his 2023/24 tax return by 19th July 2024 (i.e. within the 60 day window), then a CGT property return will not be required to be submitted.
However, to do this, the CGT reported on the SA return must be at least equal or greater than what would have been reported on the CGT property return.
Conclusion
It is vital that personal landlords advise their accountant as soon as they have completed the sale of a rented residential property.
The capital gains tax on UK property return has to be filed and the appropriate CGT paid within 60 calendar days of completion. There are heavy penalties and interest charges for failure to pay and file on time!
These are tough times ahead for landlord clients and it is vital that they liaise with us in order that we can ensure that they meet their stringent tax return reporting requirements and CGT payment obligations.
I will be presenting a complimentary webinar on behalf of Gravita, later this year, setting out in more detail the landlords current tax regime, and the tax planning opportunities available.
Tax Consultant
Gravita
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