Residential property owners will need to be on the ball from 6 April 2020, when new rules come in for the reporting of Capital Gains and payment of Capital Gains Tax.

New Capital Gains Tax legislation has been passed affecting Individuals and Trusts which will have a major impact on their filing and tax payment obligations when they sell UK residential property from 6 April 2020. The legislation applies to capital gains tax (CGT) only and does not apply to companies.

The April 2020 changes are an extension of the current rules which have applied to the disposal of UK property by non-resident persons from 6 April 2015.

Disposals before 6 April 2020 (UK resident individuals and trusts)

Before 6 April 2020, a UK resident individual or trust disposing of UK property that resulted in a taxable gain was required to report that gain on their annual UK self-assessment tax return or by using the HMRC ‘Real Time’ capital gains tax service. The deadline for reporting the gain and paying the tax due was either the 31^st of December or the 31^st  of January following the year of the disposal, depending on which option was used.

Disposals from 6 April 2020 onwards (UK resident individuals and trusts)

From 6 April 2020, a UK resident individual or trust disposing of UK residential property will be required to file a ‘UK land return’ within 30 days of the completion date of the disposal. Where properties are held jointly or in partnership, each owner is required to submit a UK Land return (and pay the tax) in respect of their share of the disposal. Penalties will apply if the return is filed late.

The seller will also be required to pay an estimate of the CGT 30 days from the completion date. This will be treated as a “payment on account” against their total income tax and CGT liability for that year when the annual self-assessment tax return is submitted.

The individual or trust will, therefore, be required to estimate how much tax is payable. This will depend on several factors which could result in a refund/additional liability being due when the annual self-assessment return is submitted. If additional tax is due when the annual return is filed, then interest will be payable at the standard rates set by HMRC.

Exceptions

Some common examples of where a UK land return will not be required are:

• Where the gain is fully covered by principal private residence relief (‘PPR’) throughout the duration of the taxpayer’s ownership. 
• If a loss arises on the sale of the property
• The gain is sheltered by capital losses crystallised before the sale takes place
• The gain is small enough to be covered by the individual’s annual exemption for the year of disposal.

In practice, a UK land return will be required for let properties, second/holiday homes and homes with extensive grounds and gardens not fully covered by PPR, in so far as such disposals give rise to a CGT liability.

The return and payment on account will not be required where the property disposed of is not residential property or where the property is situated outside the UK.

The above list is not exhaustive and, if you have any doubt over whether a return will need to be submitted, please contact one of our team to discuss.

From a practical perspective, the taxpayer will need to rapidly determine whether (or to what extent) their gain is sheltered through PPR relief and, if it is not fully sheltered, what the gain will be and to what extent it will be sheltered by crystallised capital losses or their annual exemption. These calculations can be complex and in some cases even require valuations be obtained. Taxpayers should contact their tax advisers as soon as they decide to put their UK residential property on the market. 

Non-UK residents

Non-UK residents have already been required to file returns within 30 days when they have disposed of UK property, both residential and non-residential, since 6 April 2015 and 6 April 2019 respectively. There are no changes for disposals by non-UK resident individuals or trusts from 6 April 2020.  Fewer exceptions exist for Non-Resident CGT returns, which are still required even where there is no NRCGT payable.

Non-resident companies were within NRCGT for disposals of UK residential property before 6 April 2019, but are now within corporation tax and no longer subject to the reporting obligations described herein.

Filing Procedures

Currently the NRCGT returns must be submitted through the HMRC website. HMRC has stated that it is developing a new process for the UK land returns; it is expected to be similarly accessed through the HMRC website.

Penalties

Penalties for filing the UK land return start at £100 immediately.  If the return is more than 6 months late a penalty equal to the higher of £300 or 5% of the tax due is payable.  If more than 12 months late, a further penalty of either £300 or 5% of the tax will again be due.  £10 daily penalties may also be levied for up to 90 days (between 3 months and 6 months of filing date), but by concession HMRC has stated that it will not usually charge these. For larger transactions, the 10% penalty could be quite significant.

As with other penalties, a taxpayer may be able to appeal on the basis of having a reasonable excuse, but, as has been seen with Non-resident CGT returns, HMRC can be resistant and taking appeals to the tax tribunals can be a lottery. 

Action after 5 April 2020

The application of this legislation to UK residents will be a ‘game-changer’ in the sense that the tax filing and payment obligations need to be considered immediately on completion of the sale rather than left until after the end of the tax year.

It will be common for individuals not to know exactly what their CGT liability will be at the time of the sale and a lot of the relevant information may not be known until after the end of the tax year. For example, this could be the case where the tax liability depends on other disposals or other income in the same tax year. You should contact your tax adviser much sooner (ideally when the property is first put on the market) when making residential property disposals in order to submit the returns on time and to determine an appropriate estimate of the CGT liability.

FAQ’s

Q: Do I have to make a return if there is no gain?

A: No, a return is also not required if the gain is covered by your capital gains tax allowance for the year (£12,000 tax free for the 19/20 tax year).

Q: Can I offset capital losses when calculating the gain arising

A: Capital losses can be offset but only if they arose prior to the gain.  Losses arising in the same year but after the property disposal can only be taken into account on your annual tax return.

Potentially this means paying a capital gains tax bill within 30 days and then having to reclaim the overpaid tax many months later in your self-assessment tax return.

Q: What if I don’t have all of the information to calculate the capital gain?

A:  You can make reasonable estimates and assumptions when preparing the return.  However, if tax is subsequently found to be underpaid when the self-assessment tax return is submitted, interest will run on the amount underpaid to the date of final payment.

Q: Can I amend the return after submission?

A: The return can be amended with actual figures any time up to the filing of the annual self-assessment tax return.  It cannot however be amended for events that occur after the return date.

Q: What happens if I miss the 30 day deadline?

A: HMRC will charge an automatic £100 penalty for a late return; if 6 months late, the higher of £300 or 5% of the tax due; if 12 months late, a further penalty of the £300 or 5%.  In addition, HMRC have the discretion to levy daily penalties of £10 for the 90 days between 3 and 6 months late.

Q:  If I make more than one disposal can I make just one return?

A: No, if there is more than one completion date then a return is required for each disposal.  Property sales with the same completion date must however go on one return.

Q:  I’m selling a shop with a flat above; how do I deal with this?

A: Any gain arising on the entire disposal will need to be apportioned between the shop and the residential property i.e. the flat.  The gain arising on the flat only will need to be reported within 30 days.  The calculation in such cases can be complex and it is important that your accountant is informed as soon as possible and preferably before the sale. 

Disclaimer
This document is intended as an information source only. The comments and references to legislation and other sources in this publication do not constitute legal advice and should not be relied upon as such. You should seek advice from a professional adviser regarding the application of any of the comments in this document to your fact scenario. Information in this publication does not take into account any person’s personal objectives, needs or financial situations. Accordingly, you should consider the appropriateness of any information, having regard to your own objectives, financial situation and needs and seek professional advice before acting on it. CST Tax Advisors exclude all liability (including liability for negligence) in relation to your reliance in this publication

This article relates to foreign business founders with an active business, who are moving to the US. There is a risk that foreign earnings may be double taxed when your organisation is taxed as a US entity. This is due to the application of US attribution rules (Controlled Foreign Corporation (CFC) rules) and Passive Foreign Investment Company (PFIC) rules.

To avoid being double taxed and ensure that foreign tax credits can be appropriately applied, it may be advisable to make a check-the-box election. This election essentially means that foreign corporations are choosing to elect their US tax status at the point in time that the US tax system becomes ‘relevant’ to them.

This check-the-box system is a tax regime that doesn’t just impact organisations that are set up in the US. It can also impact Australian businesses and global businesses when the foreign founder of the corporation moves to the US.

When does the US tax system become ‘relevant’ to a foreign corporation:

The US tax system is considered to be ‘relevant’ to a foreign corporation when one of the following applies:

a) the foreign corporation derives US sourced income;

b) the foreign corporation is required to file an income tax return in the US; or

c) the owner of a foreign corporation becomes a US tax resident (ie a US Person).

Why might a check-the-box election be made?

The most basic reason for making the check-the-box election is to ensure that the owner of the corporation in the US is properly credited with the foreign tax payments. A check-the-box election will avoid the attribution of income under CFC rules or the loss of long term capital gains tax rate discounts when shares are transferred in a passive foreign investment company (PFIC).

When will a foreign corporation be a CFC?

When US shareholders own more than 50% of the shares, either directly or indirectly, then the foreign corporation will be considered to be a controlled foreign corporation (CFC). To be considered a ‘US shareholder’ the person must own more than 10% of the voting rights or stock value of the foreign company.

When is a foreign corporation a PFIC?

A passive foreign investment company (PFIC) exists when one of the following two conditions are satisfied:

1. Passive investments generate at least 75% of a corporation’s gross income (as opposed to regular business activities); or
2. At least 50% of the corporation’s assets create passive income. Passive income includes interest, dividends and capital gains.

What is a foreign eligible entity?

A foreign eligible entity is defined by whether a member has limited liability or not. This is a default classification under the check-the-box regulations. When all members of the corporation have limited liability the US taxes the foreign eligible entity as a corporation. When at least one member does not have limited liability the entity is not a foreign eligible entity.

An eligible entity may make a check-the-box election to opt out of the default classifications.

Warning on making an election after default classification has been made

It is important to make your election prior to the default classification being applied. This is because making a later election will change the organisation’s classification. Such a change in classification can trigger a liquidation event.

When you should make a check-the-box election:

To ensure the check-the-box election is made appropriately you should consider making the election when you meet all of the following conditions:

1. you own a foreign corporation
2. the US tax system is relevant for your corporation
3. you need to apply foreign tax credits against your US corporate tax regime
4. you wish to avoid applying the CFC or PFIC rules.