Taxpayers who have sold a property, which was not their main residence, must file a capital gains tax (CGT) return within 60 days of completion if a chargeable gain arises. However, there are some interesting rules that could catch taxpayers out.
UK residents, who make a disposal of UK residential property must use the CGT on UK Property Account to report, and pay to HMRC, any CGT arising from the disposal within 60 days of disposing of the property.
(Non-UK residents must report all disposals of UK property to HMRC, even if there is no tax to pay or they have made a loss. This includes any disposal of residential or non-residential UK land and indirect disposals of UK property.)
Quite interesting point number 1
The 60-day rule is based on the completion date, not the exchange date. So, for example, if the exchange date was, say, 15 March 2023, but the completion date was, say, 15 April 2023, then the deadline for submission of the return, and payment of any tax due, is 14 June 2023.
There is no need to report any disposal where there is no CGT liability (although it is possible to report on a voluntary basis). So, if the gain is fully covered by the private residence exemption, annual exemption (£12,300 for a disposal in 2022/23, £6,000 for a disposal in 2023/24, or £3,000 in 2024/25 onwards), brought forward or current year losses, or where a CGT relief applies which reduce the gain to nil, there will be no liability. Note that for this purpose, it is normally necessary to use the date of exchange (unless the contract is subject to conditions, in which case the date of disposal is the date on which all the conditions are satisfied, i.e. the date the contract becomes unconditional).
So, continuing the above example, if the exchange date was 15 March, but the completion date was 15 April, the disposal would have taken place in the 2022/23 tax year and can benefit from a £12,300 annual exemption. Any current year losses to be deducted would have to have been incurred in the 2022/23 tax year.
The annual exempt amount should be deducted in the most tax effective way. In other words, it should be deducted from gains which are subject to tax at the highest rate in priority to those taxed at the lower rate(s). Capital losses are similarly allocated in the most tax effective way. However, in setting off capital losses, the following general rules apply:
- all capital losses must be claimed;
- capital losses must first be set off against capital gains in the same tax year (deducted in the most tax efficient way);
- after reducing the current year gains to nil, the excess is carried forward to set against gains in future tax years (deducted in the most tax efficient way);
- allowable capital losses can be carried back on the taxpayer’s death.
Quite interesting point number 2
As set out above, current year losses must be set against current year gains. This is automatic; the taxpayer has no choice.
However, only current year losses that arise prior to the date of exchange for the disposal of UK land can be set against the property gain (whether or not the loss has yet been reported to HMRC) for the purposes of completing the CGT on UK Property Account return and calculating the CGT due on account. Current year losses that arise after the date of exchange for the disposal of UK land cannot be taken into account in real time.
So, expanding on the above example, if a capital loss was incurred on say the disposal of some shares, on 31 March 2023, the taxpayer would not be allowed to deduct that capital loss from their gain on the property disposal when completing their CGT on UK Property Account return and would not be able to use that loss to reduce the CGT payable on account.
They would have to wait until completing their self-assessment tax return to be able to deduct that current year capital loss from their gain on the property disposal.
The taxpayer will have paid too much CGT on account, due to the allowable current year loss having been realised later in the tax year, and a self-assessment tax return must be filed to report the loss and correct the CGT position.
Note that this issue only affects current year losses. Losses brought forward have been quantified already and can be set against the gain on the CGT on UK Property Account return and the taxpayer would be able to use those losses to reduce the CGT payable on account.
It’s extremely important, therefore, to carefully consider the timing of disposals. Remember that it is normally the date of exchange that decides in which tax year a capital gain or loss on a property disposal falls, not the date of completion (even though the 60-day reporting deadline is based on the date of completion). And, triggering a capital loss to offset against an earlier property capital gain in the same tax year will not result in a reduction in the CGT payable on account, and although the taxpayer will get the tax back after they submit their self-assessment tax return, that could be some time later.
For more information, please see CG-APP18 Capital Gains Tax (CGT) on UK Property Account guidance. The guidance is very detailed and includes all of the information required to report the gain and pay the tax using HMRC’s CGT on property account, whether there has been one disposal or multiple disposals. It also includes information on mixed use properties, the interaction with investment bond chargeable event gains, and, where a CGT relief, for example, business asset disposal relief, applies.
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