Buy-to-let landlords and other property owners are at risk of clocking up penalties due to a little-known change to the tax rules, experts have warned.
The deadline by which owners with taxable gains on residential properties have to pay tax will shrink from up to 22 months to just 30 days, starting from April.
Under the current system, property owners have until January 31 (the deadline for self-assessment) following the tax year in which the sale of property was made, to complete a return and pay any capital gains tax (CGT). This means that, depending on the date of the sale, tax is due from 10 to 22 months after the disposal of a property.
But from April 6, UK residents who sell a residential property that gives rise to a CGT liability will need to submit a one-off return to HM Revenue & Customs and pay the tax due within 30 days of completion of the sale.
“This is a seismic change,” said John Bunker, chair of Chartered Institute of Taxation’s private client UK committee.
The changes were first announced by the government in 2015. But in the 2017 Budget the start date for the reforms was pushed back to 2020, and experts fear sellers may be unaware of the new rules.
Only property owners who have sold a residence that attracts taxable gains, such as buy-to-let landlords and those selling second homes, will be affected. People who own one property that they have lived in as their main residence throughout the ownership will not be impacted as they do not have to pay CGT — a benefit known as private residence relief.
The changes also only apply from properties sold after April 6 this year. Where contracts are exchanged under an unconditional contract in the tax year on or before April 5, but completion takes place on or after April 6 2020, the new 30-day filing requirement will not apply.
The new deadline means that those affected will have less time to calculate CGT, report the gain and pay the tax. Those who miss the deadline will face both penalties for late filing of returns and late payment of tax.
Late filing attracts an initial £100 penalty. After three months, there are additional penalties of £10 a day, up to a maximum of £900. After six months, there is a further penalty of 5 per cent of the tax due or £300, whichever is greater. After 12 months, another 5 per cent or £300 charge applies, whichever is greater.
Paying late is covered by a different penalty scheme: individuals receive a fine of 5 per cent of the tax unpaid at 30 days, six months and 12 months.
John Stewart, policy manager for the Residential Landlords Association, said: “Having such a tight turnround from sale to paying tax is likely to lead to a lot of inaccurate payments as capital gains tax is not straightforward, depending as it does on personal allowance, marginal tax rate, split of asset and sale of other assets. There is no need for the payment time to be this short.”
Richard Morley, a partner at accountancy firm BDO, added it was likely many people may miss the deadline simply because they were unaware of the changes. “Whether HM Revenue & Customs will be lenient remains to be seen,” he added.
Anyone planning to sell a property which will attract CGT may want to try and sell it before April 6, to give themselves more time to pay the tax, Mr Morley suggested.
To meet the shorter deadline, Mr Bunker recommended property owners get their records in order before a sale — including the purchase cost and date when the property was acquired and details of any improvements made during ownership.
CGT is charged at 18 per cent for basic rate taxpayers or 28 per cent for additional or higher rate taxpayers. The upcoming change will not affect buy-to-let investors who own residential property through a limited company, as corporation tax, not CGT, applies in this case.
The measure coincides with the scrapping of a valuable relief used by buy-to-let landlords which allowed them to claim tax relief on mortgage interest. From April 6 this will no longer be available.
Meanwhile, other cuts to property reliefs coming in from April could also affect property owners and landlords. These include a halving from 18 months to nine months of the “final exemption period” which gives a CGT holiday to property owners, regardless of whether they are living there at the time.
There will also be a restriction to lettings relief. Landlords who let a property they previously lived in currently gain relief of up to £40,000 from CGT when they sell the property. This rises to £80,000 for a married couple who jointly own the property. But from April, this relief will only be available to landlords who are in shared occupancy with a tenant.