Changes to Capital Gains Tax on the disposal of residential properties
From 6 April 2020, disposals of certain residential properties must be reported and with any Capital Tax Gains tax due paid within 30 days of completion.
Before 6 April 2020, if you sold a residential property in the UK and made a gain, you would be required to report and pay Capital Gains Tax when you were ready to submit a Self Assessment tax return. As many property owners knew, the length of time between the disposal and the deadline for filing Self Assessment could be a year or even up to 22 months. This meant some owners might have forgotten about the transactions and failed to pay the relevant Capital Gains Tax due many months down the line, leading to penalties.
Accordingly, HMRC has now launched a new regime which brings forward the reporting and payment of Capital Gains Tax on disposals of certain residential properties. In this article, the Tax Accountants at Tax Agility outline the changes and encourage property owners who plan to sell their buy-to-let residential properties across London, Putney, Richmond and in Surrey to come and discuss the implications of this regime and Capital Gains Tax with us.
What are the new rules
In essence, all UK residents who sell a residential property (like a buy-to-let property) and make a gain of more than £12,300 (the tax-free allowance for 2020-21) will need to report to HMRC and pay any Capital Gains Tax due within 30 days of completion. Subsequently, you will also need to disclose the transactions on your Self Assessment tax return for the relevant tax year, usually on 31 January after the end of the tax year for most people.
To be sure that you can report within 30 days, you must have a government gateway account ready, along with information that allows you to calculate the gain. HMRC has confirmed that computations can be attached when you file the report. If you don’t have enough information to compute the gain, then you must give the best available estimates and amend the Capital Gains Tax return within 12 months.
If you make a loss, like you sell the property less than what you have paid for, then you do not need to report to HMRC within 30 days unless the loss is expected to be used against other gains made on other residential property disposals later in the year.
It is also worth noting that this new reporting requirement applies to each taxpayer rather than for each property.
Exceptions
- This new Capital Gains Tax regime excludes no gain/no loss transfers (like transfers of property between spouses and civil partners), charities, pension schemes and companies.
- It also excludes disposals that realise a gain that is relieved to leave no tax liability such as selling of one’s main residence.
- Any gain made that is equal to or less than the Capital Gains Tax annual exempt amount (£12,300 for 2020-21) is also not in the scope.
Penalties
If you don’t report the transactions and pay the Capital Gains Tax due within 30 days, the penalties are:
- £100 initial late filing penalty,
- Further penalty if six months late, which will be 5% of Capital Gains Tax due or £300, whichever is greater
- Interest will also accrue on late payment
Complicated scenarios
Tax is a complicated subject and you are likely to find yourself in a situation where you aren’t quite sure how the rules apply to you. Talk to one of our Tax Accountants if this is the case by calling 020 8108 0090 today. With offices in Central London, Putney, Richmond and in Surrey, we have helped many families and taxpayers by giving them independent and trusted tax advice.
Here are two examples of how we can help pertaining to the changes to Capital Gains Tax from 6 April 2020.
Example 1: Multiple owners on a property
If you and your spouse jointly own a buy-to-let and each of you stands to make a gain of £50,000 after selling it, then each of you must report it individually as this new regime applies to each taxpayer rather than each property, unless the property is transferred first into the sole ownership of a spouse on a no gain/no loss basis.
Example 2: Computing gains
Calculating Capital Gains Tax requires information such as brought forward losses from previous tax years. We can also help to gather information such as length of ownership, base cost, costs of improvements, incidental costs, among others. While losses realised on assets that have not been reported cannot be deduced from the residential property gain during computation, we can help you to include them (and other losses made throughout the year) when completing your Self Assessment tax return, thereby reducing your tax liability.
Tax Agility can help with Capital Gains Tax
At Tax Agility, we believe in providing solid tax advice that complements your investment strategies and saves your hard-earned cash. Make use of our free initial consultation so we can understand your situations and make the appropriate recommendations.
If you will soon be selling your buy-to-let and these new Capital Gains Tax changes are likely to apply to you, give us a call on 020 8108 0090 or contact us via our Online Form to kick-start the conversation today.
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This blog is a general summary. It should not replace professional advice tailored to your specific circumstance.
Understanding dividends
When a company makes a profit, it pays dividends to its shareholders.
If you are a contractor or have recently started your own limited company, you have probably heard from other contractors or business owners about taking a low salary and using dividends to make up a portion of your income.
At Tax Agility, our small business accountants work with contractors and small business owners across London. As we are often asked about the advantages of taking dividends from a business’ profit, we aim to discuss dividends in this post.
What are dividends?
Dividends are money paid by a company to its shareholders after it has met its financial obligations (like paying business expenses and taxes). Another way to look at it is that when a company makes a profit, it usually retains a portion of its profit and distributes the rest to its shareholders in the form of dividends.
Why contractors and small business owners like dividends
The main benefits of dividends are:
- Unlike salary, dividends are not subject to National Insurance Contributions (NICs)
- The first £2,000 of dividends are not taxable
- Dividends have a lower tax rate than salaries
For tax year 2019/20, dividend tax rates are:
- 7.5% (up to £37,500)
- 32.5% (£37,501 - £150,000)
- 38.1% (over £150,000)
If you intend to declare dividends, you must hold a board meeting and minute it whenever you make a declaration. Then your accountant will prepare a dividend voucher for each company shareholder stating the net dividend paid.
Prior to the tax year 2016/17, the was something known as a notional 10% tax credit but HMRC has abolished this.
An example of dividend tax
In the tax year 2019/20, you receive a salary income of £8,600 and this is not subject to tax because the income is below the Personal Allowance threshold of £12,500. This also means you still have a balance of £3,900 left to use.
In the same tax year, you receive dividends worth £15,000 and out of this amount, you only need to pay a low 7.5% tax rate on £9,100. This is because:
- £3,900 of your £15,000 dividend income is tax-free since you have this balance from your Personal Allowance (£12,500 Personal Allowance minus £8,600 salary income)
- Another £2,000 of your £15,000 dividend income is also not taxed as you have a £2,000 Dividend Allowance
The upshot of it is you are only required to pay £682.50 tax on your £15,000 dividend income. This low rate is not achievable if you are drawing a salary. You must then declare this dividend income on your Self Assessment tax return in the ‘Dividends’ section.
IR35
If you are a contractor, chances are you already know how confusing IR35 can be. If you are considered a “disguised employee” under IR35, you will face severe tax implications. If IR35 is stressing you out, please set up an appointment with us so we can understand your situation better. Alternatively, our post “What is IR35? A brief guide to the IR35 legislation” may make a good read.
Professional advice on dividend distribution
To speak with a professional to discuss how to successfully distribute dividends to your shareholders and to maximise your take-home pay, contact one of our small business accountants in London today. You can call us on 020 8108 0090 or get in touch with us via our contact page to arrange a complimentary, no-obligation meeting.
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- The complete guide to buying a small business
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- Small Business: 5 ways to get new customers
- Five ways to improve your company’s cash flow
This post is intended to provide information of general interest about current business/ accounting issues. It should not replace professional advice tailored to your specific circumstances.