25 march 2022
Since 6 April 2020, UK tax resident individuals have had to consider whether they need to report and pay capital gains tax (CGT) within 30 days of disposing of UK residential property. This deadline was extended to 60 days in the October 2021 Budget; however, this still provides a relatively short window for taxpayers and/or their agents to complete the necessary details in their CGT on UK property account (CGT return) and pay the tax. One exception to this reporting is where the property qualifies in full for main residence relief (MRR), which exempts qualifying gains from CGT.
Similar CGT reporting and payment requirements, covering most non-UK resident individuals and other entities selling UK residential property have been in place since April 2015 (and were extended to cover non-residential property disposals by non-residents from 6 April 2019).
There are differences in the reporting requirements; the main one being that non-UK residents must submit a CGT return whether or not any CGT arises from a disposal, including where any gain arising is fully exempted by MRR. This means that determining whether or not an individual is UK resident at the point of sale is vitally important to their reporting obligations.
Determining tax residence
In the majority of cases, establishing whether or not an individual is UK tax resident will be straightforward. However, this is not always the case, and potential issues can arise where they have been resident but leave the UK in the tax year of disposal.
For example, an individual may leave the UK during the tax year but, based on their circumstances, believe they will not become non-resident for UK tax purposes until the following tax year. On that basis they would not file a CGT return when they dispose of their main residence. However, what if their plans change and they actually do not meet any of the tests in order to be UK resident for that tax year, meaning they are actually non-resident for UK tax purposes for the whole year? Potentially, their circumstances may not change until beyond the 60-day deadline for filing their CGT return, and so, despite taking reasonable care, they will have missed the filing deadline and be subject to late filing penalties.
A potential issue also arises if an individual leaves the UK in circumstances where a split-year treatment should apply, with the result that they are UK resident for the first part of the tax year and then non-UK resident for the remainder of the tax year. This means that they would not necessarily know the date on which they cease being a UK resident under split-year rules until beyond the 60-day reporting deadline.
For example, if someone intends to take up full-time work abroad, the split-year date will be the date they start that work and so they could believe themselves to be UK resident at the point they exchange contracts on a property sale such that no CGT reporting is needed. However, what if they don't take up their new employment overseas? Their split-year date could then be determined by the date they left the property. Potentially, this could be before the date they exchanged contacts, meaning that they should have filed a CGT return as a non-UK resident.
To make matters worse, there can be further conditions of qualifying for split-year treatment that rely on an individual’s residence status for the following tax year, so in extreme circumstances an individual may not have clarity over their residence position for UK tax purposes until over a year after a property sale.
What do we recommend?
Individuals should consider and document their tax residence status at the time of any relevant property disposal based on the facts available to them and their intentions at that time. If it later transpires that they were non-UK resident at the relevant date but did not file a CGT return as they believed they were UK resident, they should file a return as soon as possible. They will likely need to appeal against the resulting penalties on grounds of reasonable excuse.
In this regard, it would be helpful to taxpayers if HMRC could provide guidance to confirm that it will consider such circumstances as a reasonable excuse to appeal against late filing penalties. Furthermore, confirmation that HMRC would accept that a note explaining the situation accompanying any late CGT returns filed on this basis would be sufficient for them not to levy penalties in the first place would save taxpayers a lot of time, cost and worry.
If you require advice on reporting your property disposal, please get in contact with Alex Foster or your usual RSM contact.