Back in 2005 HMRC ran a campaign fronted by ex-Tomorrow’s World presenter and all round clever clogs Adam Hart Davis. Beginning with the presenter sinking into the metaphorical sands of a giant hourglass, he proceeds to explain just how important it is to be aware of tax deadlines. Do this, he tells us, and things really don’t need to be complicated. After all, ‘Tax doesn’t have to be taxing’.
But for such a little word, tax does cause a lot of consternation. For one thing it’s not always front of mind while you’re busy living your life, doing your job or running your business. For another, the tax tinkering that every financial year sees is often announced without the fanfare required to get mass attention.
A recent change to Capital Gains Tax (CGT) rules has seen the period for reporting and paying said tax slashed from 22 months to just 30 days. In this article we’ll explore who it affects and why it’s particularly important to understand in the current climate.
Understanding the change
The change in itself is straightforward, albeit a little abrupt. When buy-to-let landlords and other owners decide to sell or gift UK residential property (and make a taxable gain in the process), they’re required to pay CGT. For 2020/21 the rates for residential property are 18% where your annual income is below £50,000, or 28% where your income is above that figure. But since April this year, what’s changed is the period of time you have to report and settle that gain – it’s now within 30 days of completing the transaction.
If it’s been in place since April, why the increased focus now? In July the government announced new temporary rules around Stamp Duty Land Tax (SDLT) in England and Northern Ireland, raising the threshold to properties above £500,000. That’s a significant difference, and while it’s likely to be a boon for first-time buyers, it’s also really attractive to buy-to-let property owners, looking to make their money (and ultimately the income they’ll be able to get from the property) go as far as possible.
In what’s currently being described as a ‘mini-housing boom’, the concern is that people will be so occupied with taking advantage of the temporary Stamp Duty rules that they won’t be aware of, or will forget to act upon, the new rules around CGT. Further, it’s not only the buyers and sellers themselves who may be in the dark. There’s a general worry in the industry that estate agents and conveyancers might not be as well versed in the new legislation as they need to be.
The tax penalties involved
This thinking isn’t without precedent – in 2015 a similar rule change was made for non-residents selling property in the UK. Many missed the requirements to report to HMRC at the time of the sale and when they came to self assessment, they found themselves landed with a £1,000 penalty. In that case some fines were overturned on appeal, but it’s understood that the new CGT deadline is being enforced rigorously and the same leniency for simply being unaware of the rules may not be forthcoming this time around.
As current rules stand, there are penalties for late filing and late payment. Late filing incurs a £100 penalty, but after three months additional daily fines are applied – £10 per day up to a maximum of £900. After six months a penalty of £300 or 5% of the tax amount due is payable (whichever is greater) and beyond 12 months, the same again on top. For late payment, there’s a fine of 5% of the unpaid tax at 30 days, six months and 12 months.
With the deadline reduced from close to two years to just a month, and with the low awareness of the change, it’s easy to see how people could easily find themselves towards the latter, more severe end of those fines.
The good news
First, the change and its pressing importance at the moment hasn’t gone unnoticed by everyone. There are calls from within the industry for HMRC to be clearer (and louder) about the changes. While HMRC has pointed out that detailed information was published in July, backed by training sessions for estate agents and conveyancing solicitors, the circumstances of 2020 continue to defy the norm. As people rush to take advantage of new rules that amount to a serious property saving, there’s a sense that HMRC ought to take the time to refresh people’s memories.
Second, it’s important to point out that the new CGT period only affects property owners who sell a residence that attracts taxable gains. CGT after all is about capital gains, which means it falls mainly on buy-to-let landlords and those selling second homes. People who own a single property that they’ve occupied as their main residence for the whole term of ownership get what’s known as ‘private residence relief’, which means the new rule won’t affect them as they don’t have to pay CGT. That said, it’s not always easy to work out where this applies, for example, a landlord who lived in a property for many years before renting it may mistakenly believe that a sale is completely covered by private residence relief.
Of course, the really good news is that even though tax rules can be complicated and communication about them can leave a lot to be desired, it’s your wealth planner’s job to remain up-to-date with tax legislation and to keep track of how to apply it to your needs in a way that ensures you’re not paying any more than you need to. Keeping you tax efficient is part and parcel of a holistic approach to your wealth management, so we’ll always make sure that you’re aware of any tax changes and how they might affect you.
If you’re concerned about this or any other tax issues, just get in touch. We’re always happy to talk you through it and put your mind at rest. With the right people in your corner, tax really doesn’t have to be taxing.