Ready, steady, report

Ready, steady, report

Helen Thornley, ATT Technical Officer, discusses the significance of the new service for UK residential property on CGT liability

Ready, steady, report

UK residents disposing of UK residential property could be in for a shock when new rules come into force requiring them to calculate, report and pay any CGT liability with 30 days of completion.

The new rules significantly change the timing of CGT payments for UK resident individuals, trustees and personal representatives. They apply to disposals from 2020/21 onwards where a CGT liability arises on a sale or gift of land which includes a residential property. Most agents will have clients who are affected by the change and it will be essential for advisers to ensure that their clients understand how the changes could impact them.

To make these new ‘in-year’ reports, HMRC has built a new, stand-alone, CGT on UK Property Service. Agents can access this through their Agent Services Account (ASA) – but only after completing a digital handshake with the client to authorise them to act. Existing 64-8 authorisations will not be valid for this service.

To complete a digital handshake, the client will need to set up a Government Gateway account if they have not already got one, verify their identity online and then set up a CGT on UK Property account. This will generate a reference number which the client must give to their agent so that the agent can request authority to act through their ASA.

At the time of writing, we have limited detail on the processes involved. We are hoping that more detailed guidance will be available from HMRC when the new service goes live. The ATT has called for an alternative process for clients who will be unable to authorise an agent digitally.

In the meantime, any agent who has not yet set up their ASA should consider setting it up now.

Communications

Hopefully, most agents are already aware of these provisions as they were included in Finance Act 2019 but getting the message to clients is going to be key. We know that many non-residents were caught out when similar rules were first introduced in April 2015, resulting in a number of penalty appeal cases reaching the First Tier Tribunal.

While some (but not all) of those late filing penalties were overturned on appeal – and HMRC stopped issuing daily penalties in non-resident cases – we cannot expect the tribunal to have the same sympathy for UK residents who might reasonably be expected to find it easier to keep up with changes to UK law.

HMRC will be running a communication programme during March 2020 but agents will no doubt want to send more targeted information to their clients.

Clients who do not have a CGT liability – for example, if full private residence relief applies – can be reassured that they don’t have to report in-year. Unlike non-residents, who must report all UK land disposals, UK residents only need to report if a payment on account of the CGT (calculated according to the special rules for in-year reporting) is required.

Time for coffee

If you haven’t already contacted your professional network about the changes, now would be a very good time to make sure that all your intermediaries – including solicitors, land agents, banks and estate agents – are aware of the rules and your ability to advise on them. The more people involved in the property disposal who understand the possible need for action within the 30-day period, the greater the chances of taxpayers complying.

Regular reminders

Paying CGT on a property sale may well be a one-off event for smaller landlords or second homeowners, and it may be some time before they come to sell. Regular reminders of the need to tell you well in advance of any planned sale will be needed.

Cash flow

This is of course not just a reporting issue. The requirement for a payment on account of CGT means that clients will need to make sure they have funds in place within the 30 days following completion. That might be difficult where the CGT liability arises on a gift or where the disposal has been made to fund a major outgoing of any kind.

Letters of engagement

You may wish to consider revising your letters of engagement in the light of these new in-year reports. Clients need to understand their obligation to tell their agent in good time of any planned disposals so that the agent can help them comply with the 30-day reporting deadline.

Fee structures

In-year reporting is going to involve additional time and costs over the regular compliance cycle. While having already calculated a gain might speed up the year-end computation, the additional reporting, potentially under significant time pressure, together with the potential for amendments could lead to increased overall costs.

Budget 2020

When considering who might be affected, don’t forget the changes to private residence relief which are anticipated in this year’s Finance Bill. The proposed restrictions to private residence relief (including letting relief) may well increase the number of clients who will incur a CGT liability on the disposal of a residential property.

Once a dwelling, always a dwelling…

Another potential pitfall is that the rules apply to any UK property that has included a dwelling at any point during a person’s ownership. Even if there is no dwelling in existence at the time of disposal, if the property included a dwelling in the past, the disposal will need to be reported.

Dates and deadlines

Finally, it is hugely important to understand that while the date of the disposal for CGT purposes will still be the date of the exchange (for unconditional contracts), the reporting obligations run from the date of completion – usually the point at which the keys to the property are handed over.

It follows from this that if your client manages to exchange on their property sale by April 5, 2020, so that the liability arises in 2019/20, the new reporting rules will not apply even if completion happens on or after April 6, 2020.


By Helen Thornley, ATT Technical Officer

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