Most of us ignore Capital Gains tax on houses, after all your house has the benefit of the Private Residence Exemption. The first issue here is that it is the Principal Private Residence Exemption not just the Private Residence exemption. If you have a second home then that will be subject to Capital gain tax on any disposal, which covers both a sale and any other disposal, such as a gift or a sale under value.
The rules relating to this exemption have been tightened considerably over the years. In particular the overlap period during which it is possible to claim the exemption (this was introduced to cover the circumstances in which you purchased a new house before selling your old one, as might happen on a job relocation or when trying to sell a house in a poor market) has been progressively reduced from 3 years to 9 months (6th April 2020). It has become increasingly common for the Revenue to challenge the status of a property as a principal private residence, this is usually based on such things as limited occupation.
The Principal Private Residence Exemption is one which has a number of intricacies about therefore extra care has to be taken. However the main purpose of this article is to highlight new rules relating to the timing of submission of tax returns and payments of Capital Gains tax, arising from the sale of Residential Property.
Firstly the rate of tax for disposals of Residential Property is 18% or 28% while the rate of tax for the disposal of others assets is 10% or 20%. The rate of tax is determined by your income, but executors and trustees always pay at the higher rates.
Secondly, with effect from 6th April 2020, there is an obligation to submit a tax return and make payment of tax within 30 days of a transaction. Capital gains tax returns and tax payments for other assets are not due until 31st January of the year after the disposal.
- For example if a disposal of shares was made on 5th May 2018, the tax return and payment are not due until 31st January 2020.
This new tight time limit for returns and payment could give rise to a number of serious consequences for a taxpayer. A disposal of property for the purposes of Capital Gains tax takes place on the date on which contracts are exchanged, not, as most people think, on the date of completion.
What happens when the contract provides for a deferral of the completion date?
Our current understanding is that it is a case of “hard luck” you still have to pay the tax. The rules have not been completely finalised so it is hoped that this issue will be addressed. Perhaps, more importantly, it will be essential to do your homework before contracts are exchanged.
What was the original acquisition cost of the property? Has any allowable expenditure been incurred which could be offset against the sale price?
For executors and trustees these questions could be quite difficult to answer. In general the probate value is the acquisition cost for a property held by executors. But can you be sure that HMRC have agreed the value? Where Inheritance tax is payable this is generally fairly clear, but where no inheritance tax is payable HM Revenue and Customs do not agree the value, what is put into the probate application may be a guide but it is not definitive, and could be subject to negotiation with the Inspector of taxes after the Capital Gains tax return is submitted.
We frequently see cases where a probate application has been submitted with a grossly inaccurate property valuation, most frequently the valuation is low, doubtless submitted in the belief that probate value is supposed to be low. Occasionally it is the reverse, usually reflecting a case where an estate agent has inflated the value in the hope of persuading you to use his/her services because they promise to achieve an impossibly high price, which at the end of the day was hopelessly inaccurate. These two scenarios, not properly managed, could result in a tax return being submitted which either exposed the Executors to a very high Tax charge or alternatively leave the executors believing that they have no liability, when in fact they might have one. In both cases a proper and carefully considered valuation could spare the executors a lot of last minute pain trying to prepare a tax return. Equally important – having a correct valuation might enable the executors to plan for ways of mitigating the tax in the event that there really has been a substantial gain.
It should of course be remembered that the tight time limits are not just for decoration, failure to submit on time, or an inaccurate declaration based on an inaccurate valuation might leave you exposed to penalties and or interest being charged for late payment of tax. Don’t think that HMRC will be forgiving, or that ignorance is a defence. A similar scheme was introduced for non Residents selling UK Residential property after 6th April 2015 and many penalty notices have been issued because of the late submission of returns.