Selling Residential Property- Just 30 Days to Pay Capital Gains Tax?

Issac Qureshi looks at the harsh new capital gains tax regime that the government intends to impose from April 2020.

The proposal to drastically shorten the interval between making a capital disposal on dwellings and settling any capital gains tax (CGT) due has been around since the Autumn 2015 statement.

However, the basic mechanism will apply as originally envisaged; UK investors who dispose of residential property will be obliged to make a payment on account towards any CGT due, within 30 days of the disposal of the property. It is yet another thinly-veiled tax grab on buy-to-let (BTL) landlords, with little evidence to support the claim that it will reduce the risk of non-payment of CGT, so as to warrant the additional burden on taxpayers.

Self-assessment

This requirement should be looked at first from the perspective of the current regime — self-assessment.

By way of illustration, CGT due on a disposal at any time in the current tax year (2018/19) — ending 5 April 2019 — will not be due until 31 January 2020. This means that a disposal made as early as 6 April 2018 need not be paid until almost 22 months later.

This may seem exceptionally generous, but in CGT terms there has always been a relatively long lead time between gain and payment, for several key reasons:

• CGT is generally triggered on exchange of contracts, which may be a long time before the selling party receives any proceeds;
• proceeds may be received in installments — depending on the circumstances, it may take many months or even years before sufficient proceeds are received to cover the CGT due;
• CGT may be due even when no (or negligible) proceeds are due, such as when property is gifted or deliberately sold at undervalue so that the person disposing of the property will have to fund the CGT liability from other sources;
• likewise, the vendor might want to re-invest the proceeds into another asset. For most BTL landlords, there will be no form of re-investment relief, meaning that the CGT on disposing of the first asset may have to be funded elsewhere (typically by borrowing, secured against the replacement asset). It is fair to allow the taxpayer sufficient time to select a suitable replacement property and secure borrowing as appropriate;
• particularly in relation to property, the vendor may first have to settle any debt to the mortgagee, and raise the balance of any funds to settle the CGT due (this will be relevant where the level of gearing is high); and
• the calculation of CGT due can be a time-consuming process, potentially involving theoretical valuations that may require fresh instruction to professionals, such as a chartered surveyor for a March 1982 valuation, if the property has been acquired prior to that date, as well as reviewing (tracking down!) records that may stretch back several years, or even decades, in the case of property.

Note that reporting under self-assessment will still be necessary, just as now; the new regime simply imposes an additional requirement to pay the CGT sooner than under self-assessment — and by implication, to work out how much CGT is actually due beforehand.

Teething troubles

Something akin to this regime has actually been around for several years already; the non-resident CGT (NRCGT) regime imposed a CGT charge on non-residents disposing of UK property, broadly to the extent that the gain is deemed to have arisen since April 2015.

Since that charge was introduced, non-residents who disposed of residential property in the UK have had to declare the disposal within 30 days and pay any CGT calculated to arise, unless they already file under self-assessment, in which case payment can be deferred until the normal due date under self-assessment. A taxpayer’s already being in self-assessment does not, however, relieve them of having to file an NRCGT return.

One of the most notable issues arising from the introduction of the NRCGT regime is how many penalties HMRC has managed to raise for failing to file an NRCGT return within the 30 day deadline — at times, more than a third of all NRCGT returns have been late. One of the key reasons for this is HMRC’s failure to adequately publicise the new regime. This could easily happen again when the regime is introduced for UK resident taxpayers.

Note that while the NRCGT regime currently allows non-residents who are also self-assessment taxpayers to defer payment until the usual self-assessment deadline, this will be changed to align with UK resident taxpayers for disposals from 6 April 2020 — i.e. from that date a CGT payment on account will be required within 30 days of sale, even if the taxpayer is also within the self-assessment regime.

The mechanics

Unlike CGT generally, the 30-day clock starts on completion of sale, rather than on exchange of contracts.

When calculating any CGT to be paid on account, the taxpayer can utilise losses brought forward, including in-year losses. But if the taxpayer makes a capital loss later in the year, this may be ignored unless another CGT payment on account is required later on. It follows that it may be better in some cases to crystallise losses before gains.

Basically, a gain is not reportable under the new regime unless there is CGT to pay. Exceptions could be because of losses and the annual exemption, excepted transfers (such as between spouses, etc.) or where principal private residence relief applies in full.

Don’t get caught out!

CGT in the UK is calculated on the basis of gains and losses arising in a tax year; likewise, UK landlords are used to having to deal with their tax affairs mostly on an annual basis. This will have to change.

Landlords and their advisers will need to get used to the new CGT reporting and payment requirement, and to estimating in-year income, gains and losses. A 30-day notice period gives precious little time to collate the historic records that will often be required to calculate the CGT that will be due. It may well be better for property investors to let their adviser know as soon as they decide to market a property, rather than to wait until it is sold and the countdown begins in earnest. Advisers may want to warn all clients who own residential property, so that they are prepared for the new regime.

It will apply to non-UK properties as well, although there are exclusions for properties in territories subject to a double taxation agreement, or where the remittance basis applies to the taxpayer.

Gifts may also be problematic; many landlords wrongly assume that there is no CGT on gifts because there are no proceeds. Gifts between spouses who are living together are normally exempt, but otherwise property gifts are rarely protected. An adviser may have plenty of time to address this misunderstanding before the tax return and payment are due under the current regime, but not from April 2020.

In particular, the disposal of one’s only or main residence will not automatically be exempt from the new regime. While the main residence will often effectively be CGT-free, there may be times when the period or proportion of non-qualifying use means CGT is due — so a report and payment on account will soon be required.

Practical Tip

UK resident companies are not subject to the new regime. Yet another reason for BTL landlords to seriously consider incorporation! Get in touch if this is something you would like to explore further.

Estate Planning: Leaving Your Business To Your Heirs

Issac Qureshi, a tax specialist looks at ways to pass on an owner-managed business. This article outlines some options open to a business owner to successfully leave the business to others. Inheritance tax (IHT) is an important consideration on death; chargeable assets above the ‘nil rate band’ of £325,000 (for 2018/19) could be subject to IHT at 40%.

Sole trader business

On death, the assets of the business are personal and fall into your estate for Inheritance Tax purposes. The business could be sold as a going concern by your executors, but cash would be paid to your estate. Employees of the business could have a redundancy claim against your estate.

Consideration could be given to a double option or ‘buy and sell’ agreement with a similar business as a form of succession planning, where the parties insure each other in trust to purchase the business on death.

Partnership or LLP

An active partner’s (or limited liability partnership member’s) capital account is an integral part of the business. On death, it is treated as a business asset and potentially qualifies for IHT business property relief (BPR) — but the conditions for BPR must be satisfied. If BPR was available, no IHT would generally be payable on the value of the capital account of an individual who was an active partner in the partnership on death. Property owned by the partner and used by the business could also be eligible for BPR relief.

Losing a partner could create future cash flow problems. Consider using life assurance to cover repayment of capital accounts if possible, as well as the purchase of any property share used in the business. Alternatively, consider a small self-administered pension fund to purchase the business property to ensure continuation.

Limited company

On death, shares in a company can qualify for BPR for IHT purposes if certain conditions are satisfied.

Shares in a private company are subject to IHT. However, BPR is a very valuable relief, which can enable the shares to be transferred on death or during lifetime free of IHT.

BPR qualifying conditions

To benefit from BPR in the case of shares in an owner-managed or family company:

• the shares generally need to have been owned for at least two years;
• the company must broadly carry on a trading business as opposed to an investment business. BPR is not generally available if the company wholly or mainly deals in securities, stocks or shares, land or buildings, or makes or holds investments;
• a holding company with trading subsidiaries can qualify for BPR;
• some assets will not qualify for BPR — if not used wholly or mainly for the business during the last two years, nor required for future business use. Included here are high levels of cash;
• where shares are subject to a binding sale contract, no BPR is available. It is important to make sure that any shareholders’ agreement, providing for shareholders to purchase the shares of a deceased shareholder, does not result in a binding contract and the loss of BPR.

Practical Tips

If a company will be operating both a trading business and an investment business, BPR can be put at risk. In that case, consideration should be given to separating the businesses.

Avoid leaving shares to a spouse or children without proper planning. Does the company declare dividends, or are the shares a minority holding? Shares could be left to a family trust to benefit spouse and children, etc. On the death of the surviving spouse, shares or cash will be free of IHT as they are in trust (although the trust will generally be subject to IHT). Alternatively, use a ‘double option’ agreement between shareholders with life cover in trust to create cash to purchase shares on death. This is a contract post-death and not subject to IHT (as opposed to a ‘buy and sell’ agreement, which is a contract pre-death where you could lose the BPR).

Note that a director’s loan account is not covered by BPR and could be subject to IHT.

It is important to have succession planning strategies in place. Decide where your shares will go on death — either to family or other shareholders. Proper planning could save your estate significant amounts of IHT.Get in touch if you would like a no=obligation discussion with myself and the specialist team based in London, Manchester, Birmingham and Leeds.

Cash In On Tax-Free Savings!

Here is an update on current opportunities to boost savings by Issac Qureshi, a wealth management strategist based in London.

Whilst interest rates remain relatively low, bank and building societies are often unable to provide investors with a ‘wow’ factor, so any measures which incentivise savings will generally be welcomed.

Premium bonds

With a return rate comparable with regular savings accounts (currently 1.40%), it is not difficult to see why premium bonds (PBs) remain one of Britain’s favourite ways to save. In the 2018 Autumn Budget, the Chancellor announced several changes to PBs, which should help make them more accessible for all.

Currently, the minimum amount of PBs that can be purchased is £100 (or £50 by standing order). The good news is that this limit will be cut to £25 by the end of March 2019. This will apply to both one-off purchases and regular savings.

In addition, the rules on who can purchase PBs are being changed. Currently, only parents and grandparents can buy PBs for children under 16. Although the timescale is yet to be confirmed, it has been announced that in future, it will be permissible for other adults to buy PBs on behalf of children. The person purchasing the bonds for children will have to be over 16 and must nominate one of the child’s parents or guardians to look after the bonds until the child turns 16.

The maximum PB holding will remain at £50,000.

NS&I has also confirmed that it will be launching a new PB ‘app’ in the new year, which is designed ‘to make saving easier’.

Although PBs are not strictly an ‘investment’, they can be encashed at any time with the full amount of invested capital being returned — and in the meantime, any returns by way of ‘winnings’ will be tax-free. The odds on winning a prize in any one month are currently 24,500 to one. There are currently two £1 million prizes, five £100,000 prizes, and ten £50,000 prizes each month.

Individual savings accounts

The maximum annual investment limit for individual savings accounts (ISAs) will remain at £20,000 for 2019/20. The limit effectively allows a couple to save a not-insignificant £40,000 a year and receive interest on the investment tax-free. There will also be no capital gains tax to pay when the account is closed.

Junior ISAs are available to UK-resident children under 18 and run on similar lines to ‘adult’ ISAs. The maximum investment limit for 2018/19 is £4,260, rising to £4,368 for 2019/20, which provides adequate scope for parents and grandparents to make tax-free savings investments on behalf of their children/grandchildren.

Help-to-buy ISAs and equity loans

Help-to-buy ISAs continue to be available to assist first-time buyers saving a deposit to purchase their first home. Broadly, up to £200 a month can be saved in the ISA (along with an initial deposit of £1,000, and up to a maximum of £12,000) and, provided certain conditions are met, the government will provide a 25% boost to the savings up to a maximum of £3,000 per person. A couple buying together could, therefore, save up to £30,000 tax-free towards the purchase of their first home.

The help-to-buy loan equity scheme for new-build properties is designed to help those with 5% deposits get on the housing ladder. The government lends up to 20% of the property price and after five years, the purchaser starts paying interest on the loan. The scheme was due to end in 2021, but it was announced in the Autumn Budget 2018 that it has been extended until 2023. However, the scheme is now only open to first-time buyers, and lower regional price caps will be applied.

Practical Tip

The government’s help-to-buy website (www.helptobuy.gov.uk) provides useful guidance on various incentives currently available to help people buy their own home.

For more information on capital gains tax, visit www.issacqureshi.co.uk