Payment on account of capital gains tax

From 6 April 2020 new rules apply to residential property gains liable to capital gains tax and from that date, UK residents will be required to make a return and a payment on account of the capital gains tax due within 30 days of the date of disposal of sale. Where the individual is a non-UK resident, the new rules will apply from 6 April 2019.

What disposals are within the new rules?

For UK residents, the new rules apply to disposal on or after 6 April 2020 on which a ‘residential property gain’ arises. Certain disposals are excluded, including those on a no gain/no loss basis (such as between spouses and civil partners). Further, they do not apply if there is no capital gains tax to pay on the gain, for example, if the gain is sheltered by private residence relief or the annual exempt amount, or if there are sufficient allowable losses available to set against the gain,

However, where a chargeable gain arises on which capital gains tax is payable, a return and a payment on account will be required.

The return

The return must be made within 30 days of the disposal where it takes place on or after 6 April 2020. So, if a landlord completes on the disposal of a buy-to-let property on 25 April 2020 realising a capital gain, the landlord must make a return to HMRC within 30 days, i.e. by 25 May 2020. This is much earlier than at present – under the current rules, the landlord would have until the following 31 January to notify of disposal on 25 April.

In the event that there are two or more disposals of residential property which give rise to gain and which complete on the same day, they must be dealt with on the same return.

Payment on account

The second tranche of the rules is the need to make a payment on account of the capital gains tax due on the residential sale. The window for this is also 30 days. Under the current rules, the capital gains tax is due by 31 January after the end of the tax year in which the gain arose.

The payment on account is calculated as if the tax year ended on the date of the disposal. This means that the annual exempt amount and any allowable losses are taken into account. It should be remembered that higher rates of capital gains tax apply to residential property gains – 18% rather than 10% for basic rate taxpayers and 28% rather than 20% for additional rate taxpayer.

Example

Kelly has several buy-to-let properties. She sold one on 30 June 2020, realising a gain of £42,000. On 1 May 2020, she sold a painting realising a loss of £10,000. It is assumed that the annual exempt amount for 2020/21 remains at £12,000. Kelly is a higher rate taxpayer.

The chargeable gain on the sale of the property, after allowing for the annual exempt amount and the loss, is £20,000 (£42,000 – £12,000 – £10,000).

The payment on account is therefore £5,600 (£20,000 @ 28%). This must be paid by 30 July 2020.

The position for the year is determined at the end of the year once the self-assessment return has been submitted. Any balance due (for example if there have been non-residential property gains in the year) is due by 31 January after the end of the tax year. If the payment on the account exceeds the final liability for the year, the excess will be refunded.