Thinking about selling residential property?

Preparing for the sale

Taking preparatory steps in advance of the sale is now more crucial than ever, given the short window for reporting. If your return is not submitted in time, you risk penalties and interest for late filing of the return and late payment of any tax on the capital gain. It’s important to keep in mind that if the property is held jointly, each joint owner is required to file a CGT return within 60 days after the completion of sale, reporting their share of gains. 

The preparatory steps include, but are not limited to, the following:

1. Informing your tax adviser about your intention to sell a residential property in the UK as early as possible, to establish a plan of action.
2. Obtaining records that include details such as:
   • The date the property was acquired 
   • The acquisition cost 
   • Improvements made during the period of ownership
   • Disposal proceeds and associated costs
3. Setting up the ‘Capital Gains Tax on UK property’ account with HMRC. This is an essential step that is often overlooked but it is the only way gains on the UK residential property can be reported to HMRC. Failure to set up an account early can lead to unnecessary delays, even if the CGT return itself is ready for submission. As the taxpayer, you, not the agent, have to set this account up online in order to be issued with a reference number. 

Estimating CGT liability

The new rules may require you to estimate your income for the financial year if you want to report the gain as accurately as possible. This is because basic rate taxpayers with gross income less than £50,270 may have at least a portion of the gain taxable at the basic rate of CGT. Gains on residential property are taxed at 18% for basic rate taxpayers and at 28% for higher and additional rate taxpayers.

In addition, it’s important to consider the availability and allocation of the tax-free annual exempt amount, which is currently set at £12,300. Especially when there are gains to be realised on sale of any other assets. Therefore, it’s essential to consider the aggregate CGT position for the tax year, even though it might be tempting to focus solely on the gains from residential property, as they are now reported separately. 

Non-UK residents and non-UK domiciled individuals

There are slightly different requirements for non-UK residents and non-UK domiciled individuals that are important to keep in mind. If you’re a non-UK domiciled resident who claims the remittance basis, you lose your annual exempt amount. Therefore you’re more likely to realise chargeable gains on sale of the UK residential property, falling within the scope of the reporting rules.

On the other hand, if you’re a non-UK resident property owner, you’re entitled to your annual exempt amount but you’re required to submit Non-resident Capital Gains Tax (NRCGT) return within the same 60-day period, even if the sale does not result in any taxable gains. You may need to ascertain the market value of the property as of 6 April 2015 (as this will form your base cost if you owned the property prior to that date), along with any other relevant details mentioned above. 

Private Residence Relief (PRR) and Lettings Relief

It is of course possible to sell property and not have a chargeable gain in excess of the CGT annual exempt amount, in which case there would be no requirement to report the sale. This could be the case where either the property has not increased in value, the gain was covered by the losses brought forward from the previous years, or the gain is wholly or partly covered by a relief such as PRR or Lettings Relief.

The main idea behind PPR relief is that CGT is not payable for the period in which you live in the property as your main residence, with further relief available at the end of the period of ownership regardless of occupancy. However, PRR and Lettings Relief have recently undergone significant changes:

• The period eligible for PRR on qualifying properties at the end of ownership is now nine months compared to the 18 months, which applied prior to 6 April 2020. For defined categories of individual, the final 36 months of ownership may still qualify for relief.
• Lettings Relief is now restricted to periods where you (the homeowner) are in ‘shared occupancy’ with a tenant. This effectively excludes you from relief periods where you do not live in the property and are letting to a third party.

It’s important to note that the garden or grounds of a dwelling house may also qualify for PPR. Where the area of garden or grounds (including the site of the house) does not exceed 0.5 hectares, relief is automatically available for the whole area.

In some cases, PPR may be available for grounds larger than 0.5 hectares, provided that the area is required for the reasonable enjoyment of the property as a private residence. In such cases, HMRC expects you to disclose the scope of relief on your tax return. It will strengthen your case by exhibiting comparable properties in terms of the size and value of the house and buildings, the ratio of those gardens, and the nature of the property’s location. Specialist land agents are used to assembling the required comparisons in support of a claim for tax relief. 

What should you do?

The 60-day reporting requirements are important reforms which present traps for the unwary and people who cannot retrieve all the records in time for the stringent filing deadline. If you’re selling your second home, have gains which are not covered by the annual exempt amount, or capital losses brought forward, you’re at risk of falling within the new reporting requirements and early payment of CGT. The combined effect of the changes potentially increases the number of residential property owners who will be liable to pay CGT. Seek advice to ensure you’re compliant and pay the correct tax when due.

For professional advice on selling a residential property and meeting your Capital Gains Tax filing requirements, please fill out the form below and one of our experts will be in touch.