WHEN IS THE CAPITAL GAINS TAX PAYMENT DUE AND HOW IS IT REPORTED TO HMRC?
Currently, when a capital disposal occurs, the capital gains tax liability is payable on 31 January following the tax year of that disposal. Therefore, most people have between nine to 18 months’ to calculate and submit the capital gains tax return. From 6 April 2020, for residential property disposals, the capital gains tax return and any tax payable must be sent to HMRC within 30 days of completion and penalties will be imposed if this is not done (both property and non-property gains will continue to be reported on the annual tax return as well, with credit given for the tax paid during the year). This much reduced timescale could prove challenging for cash flow and reporting. When considering a capital disposal, often valuations will need to be undertaken in order to calculate the potential tax at stake. This can be more difficult if you inherited the farm cottage (to be sold) as part of wider inheritance where no probate value was attributed to individual assets, or where the assets have been owned for a long time. Therefore, early professional involvement will be key to getting this information together to avoid unnecessary late filing penalties.
WHEN MIGHT A CAPITAL GAIN ARISE OTHER THAN ON A SALE?
It is important to note that it is not just the sale of a property that will trigger a capital gains tax liability. It could also occur when a property is transferred to children or grandchildren by way of a gift as part of succession planning for inheritance tax purposes. A disposal may also occur on other transfers of properties, such as a divorce settlement or into a trust. In these circumstances the same 30 day rule applies.
MAIN RESIDENCE RELIEF
Relief from capital gains tax is available when somebody sells their only or main residence. It can get rather complex for farm houses or cottages with large gardens, paddocks or outbuildings and it is always worth taking advice. The current position is that once a property has qualified as the only or main residence, the final 18 months of ownership automatically qualify for relief even if the individual no longer lives in the property during this time. This final period is set to reduce to nine months with effect from 6 April 2020.
Currently, once a property has qualified as a main residence – but has partly or entirely been let as residential accommodation – lettings relief may exempt the capital gain for the let period, subject to certain restrictions. Lettings relief currently reduces the capital gain by up to a maximum of £40,000 per owner. From 6 April 2020 lettings relief will only be available when the tenants are in shared occupation with the owners of the property. This restriction to the relief could have a significant impact on the tax liability where a main residence which has at some stage been let as residential accommodation is sold.
If you are considering selling you may wish to consider the benefits of making the disposal before 6 April 2020. A delay will have a negative impact on the tax that you are likely to pay, though clearly there may be other factors to consider and tax is only one element. Even if you do not plan on selling the property, there may be an opportunity to crystallise a disposal, perhaps by way of a gift, or the use of a trust, in order to bank the reliefs currently available. Whether or not this would be beneficial will depend on the sums involved and would need further exploration.
If you have any questions, or would like to discuss your position further with us, please do not hesitate to get in touch. You can also read more in our latest ‘Farming Matters’ Newsletter by following the link below.