Insights

We have written before about the rules in place requiring taxpayers who own a second home to report online and pay any capital gains tax (CGT) arising on its sale within 60 days; this is a commonly overlooked aspect of residential property tax compliance.

Now, HMRC is testing a new property tax policy - of writing to taxpayers about the need to advise them of a sale completion date. The trouble is, whilst these letters are informing taxpayers of their obligations, they do not explain how to calculate the tax payable or what costs can be offset.

Problems with the UK property tax rules have existed for some time and the Office of Tax Simplification (OTS) has been calling for the CGT rules to be clearer. One of their recommendations was eventually implemented – in October 2021 the deadline for reporting and payment was increased to 60 days from the completion of a sale (from the original 30 day deadline). Another recommendation, for conveyancing solicitors to help improve awareness by informing vendors about their obligations was not universally enacted, but HMRC now seems to be taking some action directly.

Since August 2022, HMRC has been sending letters to taxpayers who, according to records, were either considering selling or had recently sold a UK residential property. If the taxpayer involved used a tax agent (accountant) the agent was also sent a copy of the letter.

The exact source of HMRC’s data is unknown. Although HMRC does access data from the Land Registry, this would not have provided information about prospective sales. Some are suggesting this would have been scraped data from estate agents’ websites when buyers enquired about properties advertised for sale; alternatively it can probably be sourced from Zoopla.

If you have received one of HMRC’s letters or are in the process of selling a second residential property, it is worth being aware of the rules governing the reporting of the transaction and paying any CGT due. This is because the letters include a FAQ which does not fully explain the way any CGT tax payable needs to be calculated or reported. For example, the ability to deduct any stamp duty paid on acquisition, or the way the gain is apportioned when a property is jointly held, or has been a principal private residence for a period of time.

In summary:

When a second home or a residential property investment is sold, this must be reported online to HMRC within 60 days of completion of the sale;

• The tax due must be paid within 60 days of completion;
• Capital gains tax rates for residential property are currently 18% where the gain falls entirely within the seller’s basic rate band, or 28% where it falls within a higher rate tax bracket, or a mixture where it straddles the two;
• If a property is jointly held the gain will be apportioned and the CGT payable by each owners will depend on their tax bracket;
• Any stamp duty land tax and legal fees paid when the property was acquired can be deducted when calculating the gain;
• Costs of selling the property, such as legal fees, can also be deducted;
• Expenses incurred when renovating or improving the property after purchase and which qualify as capital expenditure can also be deducted.

Residential property tax is becoming increasingly complicated and there are many pitfalls. If you would like to sell a second property and are wondering about the tax implications we can advise. Contact us via partners@rjp.co.uk.