Do you ever get the impression that to simplify processes, the government complicates it even more? One example is the “simplification” of the Capital Gains Tax (CGT) regime regarding reporting. Selling an investment property and capital gains tax should be something on your mind if you are a landlord.
Whilst trying to simplify the process and remove the need to register for the Self-Assessment tax regime, more compliance on your part as a taxpayer has been added.
So, to give you a bit more context, The government introduced new reporting requirements from 6 April 2020. These new rules apply to you if you are a UK resident and are selling a residential property. The same rules have previously been in place for non-UK landlords and still stand.
The rules do not include your main home because that is almost always exempt from CGT. So basically, it catches second homes or “buy to let” properties.
From 6th April 2020 any sale of such properties where there is a chargeable capital gain must be reported within 30-days of completion and the tax paid within that time limit too. The time limit was extended to 60 days in the 2021 Budget.
The rules have not changed when it comes to other assets such as shares and investments. You need to report any gains using Self-Assessment.
What is a Capital Gain?
The capital gain is the profit you make on the sale of a property.
In simple terms it is the difference between the purchase price and selling price, less deductible expenses.
You can deduct certain expenses against the gain, and these can amount to a substantial sum so you should always seek professional advice. You may also be entitled to certain tax reliefs depending on if the property was ever your main home. You should always retain proof of this expenditure, in case of any enquiry by HM Revenue & Customs.
Every taxpayer is entitled to an annual exemption of £3,000 (tax year 2024/25) so tax is only payable if the gain is above this limit,
You also need to report the gain on your self-assessment (SA) tax return (if you complete one). You DON’T need to register for SA just because of the Capital Gains Tax which will be a relief for many of you.
These rules don’t apply if you are selling your main home.
How much is the tax?
The tax rate that applies to you depends on your personal tax position. If you are a basic rate taxpayer, you will pay 18% tax on any gain after the annual exemption.
If, however you are higher or additional rate (40%/45% tax payer for income tax) the rate applicable increases to 24%.
There are times when any capital gain can push you from basic rate to higher rate so take care and may be take professional help.
How do I report capital gains to HM Revenue & Customs (HMRC)?
To make things easier for taxpayers a new digital property account was set up; named Capital Gains Tax on UK Property (CGTP).
Once registered you will receive an account number unique to you.
If we are going to be dealing with the reporting on your behalf, then you need to pass the account number to us so we can complete the necessary authorisation with HMRC.
A Capital Gains Tax account will only be opened for you if you have previously been verified by the government and have a personal tax account.
You should have a personal tax account if you are a UK taxpayer. You do not need to be under Self-Assessment to have this. There are many advantages of personal tax account and we will cover this in a later blog.
You can set up your personal tax account here
If the property is held jointly, both individuals will need to create a personal tax account and CGT Account and prepare the necessary 30-day CGT Return.
Remember you need to complete the declarations within 30 days of completion. Penalties will be imposed for late filing. Time limits extended to 60 days in October 2021 as part of the 2021 Budget Announcements.
How do I pay the tax?
The Capital Gains Tax on UK Property account which is unique to you will allow you to make the payments to HMRC.
You will be given a unique tax payment reference number which should be used when making your payment to ensure it is correctly identified by HMRC. Again, the time limit is 30-days after completion (not exchange).
If you do not pay your tax on time, HMRC will impose interest on late payments.
What if I have paid too much tax, can I get a refund?
Until recently it was thought that if you have overpaid tax when disposing a property, you could recover it via your self-assessment tax return for the year in which the gain arose.
However, it has now been confirmed that the CGT overpayment will not be offset against other self-assessment tax liabilities. It will also not be repaid when your self-assessment tax return is filed and the overpayment is established. There is currently no way of automating the process. So, the workaround is to amend your CGTP
You can overpay CGT for example if you have made losses on other capital disposals or overestimated your income and used a higher rate of tax.
Any underpayments of CGT must also be adjusted via the CGTP.
The amendments to your CGTP must be completed before your self-assessment tax return is filed. Amendments cannot be made after this.
What if I need more help?
We have a team of experts at Myers Clark who can help.
We are very lucky to have a strong team with the technical know-how and experience to look after clients when it comes to their tax affairs. There is always someone here to help you if you have questions. You can meet our team here.
The general wisdom is always to seek professional advice prior to selling any properties. Get in touch if you need help