LATEST TAX UPDATE
30 Day Reporting of Disposals of UK Property for Capital Gains Tax (CGT)
This reporting of property disposals has been around, in one form or another, for 5 years now. It was first introduced for disposals on or after 06 April 2015 for non-UK residents disposing of UK residential property and the regime was then extended to the disposal of commercial property, by non-residents, on or after 06 April 2019.
The latest extension, which is for disposals from 06 April 2020, includes all disposals of UK property or land regardless of your residency status.
The regime includes ‘indirect disposals’ which HMRC defines as ‘when a non-resident sells shares in a company that derives 75% or more of its gross asset value from UK land, and the person making the disposal has an investment of at least 25% in that company which holds UK land as an investment.’
The Rules and Changes
You must report, and pay what you owe, within 30 days of completion of conveyance. For example, if you complete the disposal on 1 August you must report and pay your Capital Gains Tax by 31 August.
You must report the disposal online using the UK property service by the 30-day deadline, even if:
- you’ve no tax to pay
- you’ve made a loss
- you’re registered for Self-Assessment
You must report and pay non-resident Capital Gains Tax if you’re a:
- non-resident individual
- personal representative of a non-resident who has died
- non-resident who’s in a partnership
- non-resident landlord
- non-resident trustee
- UK resident meeting split year conditions and the disposal is made in the overseas part of the tax year
You have 30 days from the date of conveyance to report your disposal and pay any tax due. You’ll get a late filing penalty and be charged interest if you do not do this by the 30-day deadline.
If you miss the deadline by:
- up to 6 months, you will get a penalty of £100
- more than 6 months, a further penalty of £300 or 5% of any tax due, whichever is greater
- more than 12 months, a further penalty of £300 or 5% of any tax due, whichever is greater
If you have to pay any non-resident Capital Gains Tax within the same 30-day period, late payment penalties and interest may also be due if you miss the deadline.
If any non-resident Capital Gains Tax remains unpaid after 31 January after the end of the tax year of the disposal, a late payment penalty of 5% of the tax outstanding will be charged.
Non-Resident Companies Now Pay Corporation Tax on Profits Instead of Income Tax
Non-resident companies owning UK property were, up to 05 April 2020, subject to income tax under the non-resident landlord scheme. However, the Finance Act 2019 introduced legislation to move such companies into Corporation Tax (CT) with effect from 6 April 2020.
The Rules and Changes
Profits were being taxed at 20% under the income tax rules, whereas the rate of corporation tax payable is currently 19% and, if the government decides to go ahead with their original plan, this will drop further with earlier reports proposing it would reduce to 17%, however this is not confirmed.
Under the Corporation Tax rules, your company’s profits from a UK property business will be calculated by reference to accounting periods. These are aligned to the period for which your company prepares its annual accounts. Thus brings us on to the most significant change, the requirement to prepare accounts.
Whilst non-resident companies have been liable to income tax, their reporting requirements have been much less stringent than they now will be within the corporation tax regime. Non-resident companies will now be required to:
- Prepare accounts in line with UK generally accepted accounting principles (GAAP).
- Use specialist software to prepare accounts – HMRC’s free filing service will not be available.
- Submit a CT600 tax return with the company accounts.
The first accounting period for Corporation Tax start on 6 April 2020 and end on 5 April 2021. Where a company’s accounts are not prepared to 5 April, their accounting periods for CT will:
- Begin on 6 April 2020 and end on the same date as the company accounts for the first accounting period.
- Begin and end on the same date as the company accounts thereafter.
Companies must tell HMRC in writing if they prepare accounts to a date other than 5 April. Companies will now have the option to choose their own yearend date.
As always, with a new reporting requirement comes a new set of late filing penalties to be aware of:
|Time after your deadline||Penalty|
|3 months||Another £100|
|6 months||HM Revenue and Customs (HMRC) will estimate your Corporation Tax bill and add a penalty of 10% the unpaid tax|
|12 months||Another 10% of any unpaid tax|
Further Changes Impacting Residential Property Landlords (Under Personal Ownership)
The first change concerns the Finance Costs Restriction and this has been with us for a while now but, only now in 2020/21, is the full impact of the restrictions being felt.
Background – Mortgage interest restrictions
Prior to 06 April 2017, finance costs on any loans/mortgages (such as mortgage interest) used to purchase an investment property was deductible from an individual’s rental income to reduce the overall taxable profits.
As of 06 April 2017, the government began restricting finance costs on residential properties owned by individuals. This was gradually phased in with the restriction applying to only 25% of finance costs paid during the 2017/18 tax year. This has been increasing every year in increments of 25% per year.
The Rules and Changes
As of 06 April 2020, 100% of finance costs paid on residential properties is not deductible for tax.
The interest will, instead of being deductible from rental profits, attract a tax credit of 20% of the total interest paid. This means that a higher rate tax payer paying £10,000 mortgage interest on their buy to let property will be paying £2,000 more in tax every year.
The second change applies to individuals who sell a residential property that was at one time their principal private residence and the individual realises a capital gain on the sale.
Background – Principal Private Residence
Previously, the final 18 months of ownership of a residential property was exempt from capital gains tax (CGT), irrespective of whether you continued to live in the property, provided that, at any point, you had lived in the property as your main residence. This period is known as a period of deemed occupation.
The Rules and Changes
The government have now reduced this deemed occupation period from 18 months to just 9 months and therefore halved the relief available.
For those with a disability or moving in to a full time care home, the rules give the final 36 months relief and this will not change.
The third change is another tightening of an existing relief available on the capital gain realised on the disposal of a residential property.
Background – Lettings Relief
Lettings relief is another relief available to those who, at any point, had lived in the property as their main residence and has also been rented out. The relief previously available was lowest of the following:
- Period of ownership which qualifies for Principal Private Residence Relief i.e. the period during which you lived in the property as an owner occupier.
- The period during which the property was being let out to a third party.
HMRC have now tightened these rules.
The Rules and Changes
The new rules state that where a gain arises on a person’s home and, at any time during the individual’s period of ownership:
- Part of the dwelling-house is the individual’s only or main residence; and
- Another part of the dwelling-house is being let out by the individual as residential accommodation otherwise than in the course of a trade or business then lettings relief may be due.
Effectively, this means that lettings relief will not be available for those periods where an owner has moved out of the property and therefore no longer shares occupation with a tenant or tenants.
Business Asset Disposal Relief (BADR)
When an individual disposes of an asset at a gain, capital gains tax may be due. Ordinarily, for gains falling above the higher-rate threshold, this will be charged at a rate of 20%. However, if business asset disposal relief (BADR) (known as entrepreneurs’ relief prior to 6 April 2020) is available, the rate will be reduced to 10%.
BADR is applicable where individuals or trustees make “qualifying business disposals”, and can be claimed in respect of gains up to the individual’s “lifetime limit”.
Business assets include:
- Whole or part of a business. (unincorporated businesses such as sole trade and partnership)
- Shares in a trading company of which the individual owned at least 5% in the preceding 24 months and you are an employee or officer of the company.
- Assets in use for the purpose of a business.
The Rules and Changes
The lifetime limit is the total amount of capital gains for which individuals can claim BADR over their lifetime. This is £1 million for disposals on or after 11 March 2020, having been reduced from £10 million for disposals prior to that date.
Anti-forestalling rules were introduced at the time the lifetime limit was reduced to £1 million, which could result in the lower limit applying to certain disposals which took place before 11 March 2020 but which were not legally completed by that date.
IR35 in the Private Sector
Since 06 April 2017, contractors working for public sector organisations have no longer been responsible for determining their own IR35 status and the onus was passed on to the public sector organisation that they work for.
If a contractor is deemed to be inside IR35, the engager, i.e. the public sector organisation or an agency, will deduct income tax and National Insurance as they would for employees.
The Rules and Changes
In October 2018, the Chancellor delivered his Autumn Budget and confirmed that the proposed reform to the taxation of intermediaries and personal service companies (PSCs) in the private sector was to be implemented from 6 April 2020 for large and medium sized businesses. On 17 March 2020, it was announced that the IR35 private sector changes will be delayed until 6 April 2021 to help businesses and individuals who are facing difficulties as a result of COVID-19.
The IR35 changes will require all medium and large sized business to assess the employment status of any person they hire who works through an intermediary. There’s an exemption for end-clients who are ‘small businesses’ as defined by the Companies Act 2006 which means meeting two or more of the following criteria:
- Annual turnover is no more than £10.2 million
- Balance sheet total is no more than £5.1 million
- No more than 50 employees.
Where the end-client meets two or more of these criteria, responsibility for determining the IR35 status of an assignment remains with the PSC and the new rules do not apply.
Once the changes are brought in the end-client must confirm the IR35 status of an assignment by providing a ‘Status Determination Statement’ (SDS). The SDS must be provided in writing (via document or email) to the PSC worker and, if an agency is involved in the labour supply chain, a copy must be provided to the agency responsible for paying the PSC. The SDS must be provided, by the end client, to all parties before the assignment commences.
These arrangements place most of the responsibility for administering an SDS on the end-client and/or the fee payer (if an agency is involved).
If you are unsure as to whether these rules will affect you, please do get in touch with us.
Self-Employed Income Support Scheme (SEISS)
Unexpectedly the Chancellor has extended the Self-Employed Income Support Scheme (SEISS) for a further three months to 31 August 2020.
Under the original SEISS covering the period from 1 March to 31 May, self-employed individuals were able to claim a grant worth 80% of their average monthly trading profits, paid out in a single instalment covering three months’ worth of profits, and capped at £7,500 in total.
Applications for the second grant will open in August but with the grant reduced to 70% of average monthly trading profits. As before, this will be paid out in a single instalment covering three months’ worth of profits, and capped at £6,570 in total. The reduction from 80%/£7,500 is intended to have some symmetry with the phasing out of the furlough scheme for employees.
The eligibility criteria are the same for both grants and it appears that the same restrictions will apply. This means that those with trading profits exceeding the £50,000 threshold and those who commenced their self-employment after 5 April 2019 will still miss out.
The extension of the SEISS still does not cover individuals who run their self-employed business through a limited company and pay themselves with dividends despite extensive lobbying on this point.
Bounce Back Loans
In another measure designed to ease pressure on businesses affected by the Coronavirus crisis and keep small businesses operating, the government announced on 27 April a new 100% government-backed loan scheme for small and medium businesses.
- Eligible businesses will be able to borrow between £2,000 and £50,000
- Loans are be interest-free for the first 12 months
- No repayments will be due during the first 12 months
Application can be made online via a short form when the scheme opens on Monday 4 May and the government says cash should reach businesses “within days” of making the application.
Loans will be provided by a network of accredited lenders and the government will provide lenders with a 100% guarantee for the loan and will pay any fees and interest for the first 12 months. Loan terms will be up to six years. The government are working with lenders to agree a low standardised level of interest for the remaining period of the loan.
To be eligible for the scheme, businesses must be UK-based and have been negatively affected by Coronavirus.
Coronavirus Job Retention Scheme
The amount of grant available is being reduced on a phased basis from 1 August 2020 as follows:
|Month||Furlough grant||Payment due from employer||Liability for employer’s NI and pension on grant|
|Up to July 2020||Max of £2,500 or 80% of earnings||None||HMRC|
|August||Max of £2,500 or 80% of earnings||None||Employer|
|September||Max of £2,187.50 or 70% of earnings||Max of £312.50 or 10% of earnings||Employer|
|October||Max of £1,875 or 60% of earnings||Max of £625 or 20% of earnings||Employer|
|November||The scheme will end on 31 October 2020 so no further furlough grants can be claimed|
- There is a VAT payment holiday for a quarter’s payment that fell due in the period up to 30 June 2020 – the settlement of this has been deferred until 5 April 2021
- PAYE payment holidays – just contact HMRC and ask for a payment holiday, initially they gave one month but you can extend to more
- Universal Credit and Working Tax Credit payments have been increased to £1000
- Self-assessment tax payments due on 31 July have been deferred until 31 January 2021
- Business Rates Review – retail, leisure and hospitality sectors can receive a grant up to £25k if they have a rateable value between £15k and £51k
- Enhancement to statutory sick pay