Back in March 2020, written pre-pandemic, I warned AccountancyAge readers that UK residents disposing of UK residential property could be in for a shock when new rules requiring them to report and pay their CGT liability with 30 days of completion took effect. As we have recently learned, 13,113 people got such a shock in the last six months of 2020, as HMRC issued fines worth over £1.3m to those who had missed the new deadlines.
Background
From April 6, 2020, all UK resident individuals, trustees and personal representatives who gift or sell UK residential property must calculate, report and pay an estimate of the capital gains tax liability within 30 days of the date of completion.
This ‘in-year’ reporting is a big change from only reporting such disposals after the end of the tax year via self-assessment – and requires taxpayers to use special rules to determine their estimated CGT liability before the end of the tax year. Only those with residential property disposals where a CGT liability does not arise (for example because private residence relief covers the gain), are excluded from these reporting requirements.
The new provisions primarily (but not exclusively) affect landlords and second-home owners. They are based on similar rules for non-residents introduced in April 2015 (and which were significantly extended for non-residents in April 2019).
Awareness
Although the UK housing market was shuttered for the first lockdown, it has rebounded with some force since reopening in May 2020, with viewings continuing throughout subsequent lockdowns. The surge in demand has been driven by a combination of an increased number of people looking to change their lifestyle post pandemic, and the SDLT holiday (which is being phased out from the end of June). As a result, some areas of the country have seen high volumes of transactions in residential property and it’s crucial that those who expect to have to pay CGT on their disposal are aware of the new measures – and make appropriate plans to comply with the new rules – for example by contacting their accountant early enough to enable the necessary calculations and report to be made.
Since most taxpayers are used to tackling tax on an annual basis via self-assessment, this extra in-year report under significant time pressure is a big change. While HMRC did allow for a penalty-free ‘soft landing’ period, this only applied for disposals which took place in the first three months of the 2020/21 tax year. Those who miss the deadline after that time without a reasonable excuse will find themselves liable to a £100 fine.
Technical challenges
Once the taxpayer is aware of the need to report, the next challenge is making the report. By default, the report (and payment) should be made online, using the new UK Property Reporting Service.
All taxpayers – even those who want to appoint an agent to handle the reporting – need to set up a Property Account through the service in order to proceed. As part of the process of creating this account, the taxpayer will need to go through the Government Gateway and verify their identity. Once that step is completed, they will get a username and password with which they can access their Property Account.
Confusingly, the UK Property Reporting Service is a standalone service, and not part of the Personal Tax Account (PTA) which around 14 million people accessed last year. The property service can only be accessed by following the links on the UK Property Reporting Service pages. However, anyone who has already set up a Government Gateway to access their PTA will be able to use the same login credentials on those pages to set up a Property Account relatively painlessly.
The guidance on this process on GOV.UK is fairly limited and the ATT has written a step by step guide to help members get their clients signed up and appointed to act.
Paper alternative
We have received a number of reports from members whose clients have struggled with creating a Property Account as they are unable to verify their identity online. Other members report clients who are not digitally savvy as unable to manage any of the steps involved.
The HMRC helpline (0300 200 3300) will provide help and support to taxpayers experiencing problems with getting set up or authorising their agent online. For those in real difficulty, a request can also be made for a referral to HMRC’s Extra Support Team. But where an individual cannot pass the identity checks or is completely unable to handle the online requirements, the alternative is to request a paper form.
The downside of reporting on paper is that the taxpayer (and their agent) won’t be able to access the same functionality as the online service such as tracking payments made, and making online amendments. Those reporting on paper forms have also told us that it is taking HMRC a number of weeks to process the forms received and issue demands for payment.
Given the 30-day payment deadline, the processing delays for paper returns have caused concern. However, any time taken by HMRC to process the paperwork will not be counted towards the 30-day period and, in practice, taxpayers who reporting on paper are simply being given 14 days to pay from the date when HMRC actually issue the demand.
Future challenges
As the report has to made ‘in-year’ it is likely to contain estimates – either of the individual’s income or possibly of figures relevant to the computation of the gain itself.
For those who, apart from the disposal of the property, would not be required to complete a self-assessment return, it should be possible to finalise their affairs entirely through the UK Property Reporting Service by correcting any estimates of income, valuations, residency or reliefs through the service and thus avoid coming into self-assessment altogether. (The classic example here will be a second-home owner with employment income who is not normally in self-assessment but whose income changes after the report because of an unexpected bonus, change in hours or job loss which then affects the tax due.)
But for landlords and others already in self-assessment for other reasons – including those with other gains or losses which need to be taken into account to finalise their CGT position – it is important that the disposal is reported again as part of their self-assessment. The SA108 pages have been updated accordingly to request details of previously reported disposals.
The ATT is speaking to HMRC about getting clearer guidance on how the in-year reporting and self-assessment interact as there are a number of unsatisfactory features of the process at present.
The primary concern for many agents is what happens when an individual is due a refund of the CGT paid on account during the year, as it does not appear that HMRC’s self-assessment proforma computation will allow the excess to be offset against any wider self-assessment liability. We, and other professional bodies, are pursuing this with HMRC as a matter of urgency. More details of this and other issues with the service can be found on HMRC’s Agent Forum (details on how to join can be found here.)
In the meantime, advisers will need to keep reminding their clients of these new rules to avoid adding to the number of taxpayers who have unwittingly incurred penalties for failing to meet an obligation that they were unaware existed.