Ian McMonagle: Pitfalls looming for property owners as new tax rules come into effect
Ian McMonagle, tax specialist at Russell & Russell Business Advisers based in Glasgow, is predicting a fresh spate of late notice penalties in the wake of changes made at the start of this tax year to how and when residential property owners pay tax on the sale of a home.
The changes to the rules on Capital Gains Tax (CGT) came into effect on April 6 of this year. Mr McMonagle says the new method for paying CGT will make it tricky for those who own more than one property to calculate their liability in what is set to become a far tighter deadline.
There is usually no CGT applicable on the sale of an individual’s principle private residence. But for those who own more than one property – buy-to-let landlords, for example – the new rules state that HMRC must be notified and paid any CGT due on a sale within 30 days of the transaction closing.
The Chartered Institute of Taxation has called this a seismic change, and that’s not an exaggeration. Non-UK residents have been required to report residential property gains and pay CGT in this way since April 2015, so this change will make it the same for all who own multiple properties, regardless of where they live. There were a raft of late filing penalties when this came into effect for non-residents, and there’s no reason to believe it won’t be the same this time around.
A property sold up until 5th of April 2020 falls in the 2020 tax year rules, with the CGT due to be paid by 31st January 2021 through Self-Assessment. All properties sold from 6th April 2020 onward must be reported and paid within 30 days of completion.
CGT is calculated by subtracting the costs of the sale – the original purchase price paid, plus estate agency costs, legal fees and stamp duty attached to the sale – from the sale price.
The resulting difference, the proceeds, is where CGT is applied. However, the amount of tax charged depends on whether the seller is a lower or higher rate taxpayer: 18% for those below Scotland’s £41,000 threshold, 28% for those above.
This is where the difficulties will come in, particularly for those whose annual income is variable. Any CGT payment will need to be based on the seller’s best guess of what their income will be in that year, which could be particularly problematic in the early part of the tax year.
So you will know the gain, that is easy enough, but you have to estimate the rate of tax you pay. All of this has to be done in a very tight deadline, so it could be quite difficult to calculate your liability in such a short timeframe.
There is an automatic £100 fine for failure to notify HMRC within 30 days, plus interest for any late payment. Getting the rate of tax wrong could also lead to penalties, though Ian said the tax authorities are likely to be lenient in the first year if the margin of error is small.