You must tell them, Pike! – new property disposal tax rules explained

Tim Walford-Fitzgerald offers an introductory guide to new tax rules on property disposal that will apply from next month. It is long since the case that the tax obligations for conveyancing were limited to stamp duty land tax (SDLT) filings when acting for the purchasers. This changed in April 2015 when non-UK residents became obliged to report disposals to HM Revenue and Customs (HMRC) within 30 days of completing the sale. This led to a great deal of confusion and many returns were missed through simple ignorance of the new rules. Despite a soft landing, tens of thousands of returns were submitted late and the penalties ran into millions of pounds. With the First-tier Tribunal (Tax Chamber) unable to consistently decide whether ignorance of the new regime was a reasonable excuse, HMRC took the initiative and amended the penalty regime. Out went daily penalties that quickly mounted up, large arrears were cancelled and reduced levels of penalties were introduced (see table 1). From 6 April 2020, the more urgent reporting regime is extended to everyone except UK companies under Schedule 2 of the Finance Act 2019. Gone is the ability to leave the tax reporting to accountants when they prepare a tax return. Instead, many UK property disposals (both sales and gifts) will need to be reported within 30 days of completion, via the UK land return. All overseas sellers are already required to make a land return on any disposal of UK land and, from 6 April 2020, any UK individual, LLP or trust disposing of residential property will also need to consider their filing obligations. Companies must be UK resident to sit outside the new rules; non-UK resident companies will be caught, despite being in the corporation tax regime. Unlike the SDLT rules, which treat mixed-use properties as commercial, if there is any element of residential property in the title being disposed of, then a report may be needed, with a just and reasonable apportionment being made between the commercial and residential elements. Exclusions As well as disposals by UK resident companies, there are some further exceptions to the 30-day reporting regime. Transfers which will not give rise to a liability do not need to be reported. This includes: sales which are fully covered by the annual exemption; those subject to only or main residence relief (remembering that the reduction in the exemption for a final period of non-occupation reduces to nine months from 6 April 2020); no gain/no loss disposals, such as those between spouses or to charities; and disposals of pension scheme assets. Leases granted to unconnected parties on arm’s length terms without a premium being paid are also excluded from the requirement to complete a land return. Payment of tax In addition to filing the land return, there is an obligation to make a payment on account of the tax that will be payable. In most cases this will be a relatively straightforward calculation: broadly 19% of the gain for a non-resident company and (probably) 28% of the gain over the annual exemption for a trust or individual (see table 2: tax rates summarised). It becomes more complicated where elements of the gain would be taxable at basic and higher rates for an individual or there are losses or other reliefs to take into account. Relief for earlier losses If the disposal shows a gain but the taxpayer has losses to use against that gain – either from disposals earlier in the tax year or brought forward from an earlier year – then the taxpayer is entitled to take the losses into account when calculating the payment on account of tax. If the earlier losses fully cover the gain then a UK taxpayer has no obligation to file a land return. Losses do not need to have arisen on land to be taken into account, but non-UK residents cannot include losses on assets that would not be liable to UK capital gains tax (CGT) in the event of a gain. It is not possible to amend a return for losses arising later in the tax year, after the disposal has taken place, but any later land returns in the year allow the overall payments on account to be revisited. While the land return obligations look to the date of completion, it is the date of unconditional exchange that is relevant for determining whether a loss is available for relief. Losses must have been realised before the date of completion of the property disposal; anticipated losses are not included. Losses on land disposals Non-UK residents are required to report any disposal, whether at a gain or a loss. If a disposal by a UK resident shows a loss then, as there cannot be liability on the disposal, UK residents have no obligation to report the disposal. However, if the UK resident has sold several properties in the year and the second or subsequent disposal has been made at a loss then they can report if they choose to do so, and claim a refund of tax paid under an earlier land return in the same tax year. The later land return provides an opportunity to review the year to date as a whole, taking into account any losses that may have arisen between disposals. Without a subsequent land return, the taxpayer will need to wait until after the end of the tax year and the filing of their annual tax return to reconcile their true position and reclaim any overpayment of CGT. The option to file a voluntary return may be attractive. While HMRC will pay interest on any overpaid tax it will be at the official rate of 0.5%. Timing and penalties The land return needs to be filed within 30 days of the date of completion, even though CGT normally looks to unconditional exchange as the operative date. The tax is also payable at this date. Failing to file the return brings an automatic £100 penalty. This increases, and becomes tax geared, after six months and again after a year (see table 1 for penalties.) Interest will also be charged on any late paid tax and possibly late payment penalties of 5% of the tax. Good news and bad news for any procrastinators: there is no registration requirement to complete the online return, so penalties can be avoided at the last minute – if the computations can be prepared. But a reference is needed to make the payment on account, so interest charges will almost certainly be unavoidable where no reference is available. In practice, prompt registration will be needed for full compliance. A word of warning for taking things to the wire – penalties can be charged by HMRC for inaccurate returns if reasonable care cannot be evidenced. Not just bricks and mortar It must be remembered that this doesn’t apply only to sales of land. Conveyancers may wish to remember that options over land are also caught, as are some share sales; they might consider sharing this with their commercial colleagues as the new rules also apply to non-UK residents selling property-holding companies. While diversely held structures are not affected, non-UK resident taxpayers divesting themselves of companies holding UK property may still find themselves caught – and with unexpected filing and tax obligations. While other shares may be protected, property investment company shares are unlikely to benefit from double tax treaty exemption. Not the final word In many cases, the completion of the land return will not be the end of the story. After the year-end there may still be an obligation to complete tax returns as normal, if only to finalise the tax position and claim losses that arose after the final land disposal in the year. As ever with tax, there are complexities and nuances that change regularly. Tim Walford-Fitzgerald is a private client partner at accountancy firm HW Fisher Photo: Shutterstock