One third fall foul of new Capital Gains Tax rule

Strict new rules around the Capital Gain Tax due on the disposal of residential properties hit one in three taxpayers in the nine months up to January 2021.

Figures from the Office of Tax Simplification (OTS) show that from April 2020 – when the new 30-day reporting rule for CGT came into effect – a total of 51,300 returns were filed, with a third of those (16,800) filed late.

The stringent requirement applies to landlords or anyone selling a second home and has already yielded more than £1m in penalties for HMRC. A disposal of a main residence is, in principle, exempt from CGT and no disclosure is generally required but this should be reviewed on a case by case basis.

To avoid a penalty, individuals, trustees and personal representatives realising a taxable capital gain from the sale or gift of UK residential property must make a ‘residential property return’ and a payment on account of CGT within 30 days of the completion date of the disposal. 

Unless plans are put in place to meet these requirements prior to the disposal it may be difficult to meet this deadline, particularly where the calculation of the capital gain is complex. Taxpayers who are within the self-assessment system must also complete the 30-day residential property return as well as reporting the capital gain on their annual tax return. 

In its report, Simplifying practical, technical and administrative issues, the OTS recommends HMRC should integrate the different ways of reporting and paying Capital Gains Tax into the Single Customer Account. 

It also states the requirement to report taxable gains within 30 days was a “very ambitious” target by HMRC and suggests ministers should consider extending the deadline to 60 days. OTS says this will give the 150,000 individuals who report a disposal of residential property in a typical year more time to consider whether they have a taxable gain. Alternatively, OTS says the Government should mandate estate agents or conveyancers to distribute information to clients about HMRC’s strict requirements as many taxpayers only find out about their obligations after the sale of their property.

The rules, of course, only came into effect from April 2020 when the country was in the midst of lockdown and it is acknowledged that there was not sufficient information from the Government regarding the changes. However, as the economy continues to open, and residential property sales continue to rise, an increasing number of individuals will be caught. 

As accountants and tax advisers we are not often involved in the sales process so may not be aware of the disposal until after the event. Early engagement is key to ensuring filing objectives and tax payments are made on time.