Getting your tax right on property sales
According to HMRC, UK property transactions in March 2021 were at their highest level since records began in 2005. Driven by a combination of the extended Stamp Duty holiday and growing confidence in the UK post-Covid economic outlook, house prices have risen by more than 8% over the past year, with one in six properties currently selling for more than their asking price.
Many workers have reconsidered where they want to live, leaving cities in favour of more rural areas, shifting their working patterns from full-time office working to a more work-life balance friendly of fully home working or a combination of the two.
Those simply moving home (having lived in the property as their only or main residence throughout) should benefit from full relief from Capital Gains Tax (CGT) – so nothing needs to be reported to HMRC and no tax to pay.
However, those selling an investment property, second home and generally property that has not been occupied as their main home throughout their ownership period, need to navigate the CGT rules with care.
30 day Capital Gains Tax return
Since April 2020, where CGT is due, UK residential property sales must be reported to HMRC within 30 days of completion, with an estimate of the CGT paid to HMRC by that same deadline. This very short “real time” tax deadline contrasts significantly with the far more relaxed regime prior to April 2020 – under which the deadline to both report the sale and pay the tax was 31st January after the end of the tax year of sale (via the Self Assessment tax return).
Where the return is not filed within 30 days of the completion date a £100 late filing penalty will apply. If the return is more than three months late, daily penalties can apply, along with fixed £300 penalties at 6 months and 9 months (similar to Self Assessment tax return penalties).
It was recently confirmed that 16,000 people missed this new CGT filing deadline in the past year and, although HMRC took a lenient approach to fines shortly after the change (giving an initial three-month grace period to 31st July 2020 for early sales), more than 13,000 have still received penalties.
How much tax will I pay?
Capital Gains Tax calculations can be complex, depending on circumstances – especially where the property qualifies for only partial main residence relief (i.e., the owner has not always lived there) or the property include other buildings or has large grounds/garden etc.
The current CGT rates are either 18% or 28%, depending on income levels – with any higher rate taxpayers paying the 28% rate.
There was widespread speculation prior to the recent Spring Budget that CGT rates would increase, and possibly be aligned with Income Tax Rates (up to 40% or 45%). However, the Budget include nothing on CGT rates (only freezing of the £12,300 CGT annual exemption until April 2026). Most commentators agreed it was not the time for such tax increases with the ongoing economic impact of Covid19, and the expectation is that CGT rates will increase in the next Budget.
So, any landlords considering selling property may be advised to sell this year at the current lower CGT rates, or risk paying a higher CGT bill in future – but that must be balanced against expectations of future property prices.
Can I reduce my CGT bill?
In some cases, planning ahead for a property sale can reduce the overall CGT bill. This may involve transferring an interest in the property to a spouse so the resulting gain is shared between two taxpayers – this would allow two CGT exemptions to be offset against the gain (so the first £24,600 of gain is tax-free) and may also provide access to the lower 18% CGT rate.
If the vendor has other investments (such as a share portfolio) that could be sold for a capital loss, that loss can be offset against the property sale gain, potentially reducing the amount of CGT payable.
If you are thinking of selling a property it is important to seek professional tax advice to ensure you are fully compliant with tax reporting and payment, and also take advantage of any options to minimise your tax bill. Contact Richard Whitlock at firstname.lastname@example.org