Buy-to-let landlords and property owners who are thinking of selling properties
are advised to think carefully about the timeframe for disposals – or risk damage to their cash flow.
The warning comes in the runup to the new 30-day window for reporting Capital Gains Tax. This rule, which at time of writing is due to come into effect on 6 April 2020, says that with regards to properties which are sold at a profit on or after 6 April 2020, property owners will have to submit a one-off return to HMRC within 30 days. Tax due on that return is also due within 30 days of the sale completion date.
Not only does the new deadline impose new time pressures – under the current system, property owners potentially had up to 21 months to complete a return and pay any Capital Gains Tax – it also turns traditional tax planning techniques on their head.
Our advice to property owners looking at multiple disposals would have been to sell properties with losses in the same tax year as those with gains, which allows you to offset losses against gains reducing tax liabilities. Following this approach under the new 30-day rule could impact on cash flow, as it only considers properties at a gain, it does not consider loss making properties and therefore you cannot offset within the 30-day period.
Poorly-timed disposals could set up a game of financial catch-up as the following example illustrates:
You make three disposals in April 2020. The loss on two of these totals £50,000, while one creates a profit of £50,000.
There is no offset possible because HMRC would require the tax due on the profitable disposal within 30 days, yet would not allow relief on the loss-making properties until the next self-assessment tax return has been filed – which could potentially be January 2022.
The impact could be that you would be out of pocket from May 2020 when the tax is payable until January 2022, when your Capital Gains liability would be declared as nil and the paid tax refunded.
Assuming that the new Chancellor, Rishi Sunak, implements the 30-day rule as intended, property owners would be wise to plan ahead and plot a time frame for disposals.
Think through when would be the best time to sell – should you sell at the end of the tax year in order to minimise the gap between paying tax and claiming relief?
You will also need to identify how to finance that tax and plan on how to manage a potential cash flow deficit.
Not only will the new deadline mean that there is less time to calculate Capital Gains Tax, report any gains and pay what is due, any mistakes will leave rushed and ill-prepared property owners vulnerable to penalties for late filing of returns and late payment of tax.