Landlords and second-home owners could be necessary to pay capital gains tax within Thirty days of selling their properties, under new rules being proposed by the government.
Currently, people selling second homes or investment properties can postpone paying capital gains tax (CGT) until they file their tax return for your tax year, which could become more than 18 months following the rentals are sold. But draft legislation, originally announced in the 2022 Autumn Statement, means real estate investors may have just Thirty days to pay up.
Which? explains the proposed changes and just how they might affect buy-to-let investors.
What is capital gains tax?
Capital gains tax (CGT) is payable whenever you sell an invaluable asset for any profit.
While you have an exemption if you’re selling your primary home, you'll face a CGT bill on the sale of a vacation home or buy-to-let – and property is charged at a higher rate than most other assets.
You can earn lb11,700 (or lb23,400 for couples who pool their allowances) before you spend money tax. Above this, basic-rate taxpayers need to pay 18% of any gain on property, and higher rate taxpayers pay 28%.
Any costs involved with buying and selling the home can be deducted when working out the gain, as can capital investments, for example building extensions.
By contrast, when purchasing shares, bonds or funds, a lower 10% rate applies for basic-rate taxpayers, rising to 20% for in the higher or additional-rate tax bands. This rate will also apply for personal possessions, although the way of calculating any gain is slightly different.
When do landlords pay CGT?
Under the present rules, landlords be forced to pay capital gains tax for property sales by 31 January following the end of the tax year, at the same time their self-assessment tax statements are due (for online filings).
So, if you sold a good investment property in July 2022, it might be taxed within the 2022-19 tax year, and you could hold back until 31 January 2022 to pay the bill.
But under the new rules, you’ll need to pay up within 30 days from the sale dealing with. For many landlords, this could progress their payment date by at least a year and a half.
Under the present system, the clock starts ticking when contracts are exchanged. But confusingly, under the new system, it might start once the sale has been completed.
Why are the changes being made?
Currently, there’s a discrepancy between the date when people who file tax returns have to pay their bills for tax and when they pay capital gains tax.
Though the deadline for online tax returns is 31 January following the end from the tax year, self-assessment taxpayers desire to make advance payments for tax and national insurance, known as payments on account.
By contrast, CGT won’t be due until the final deadline, potentially meaning capital gains tax can be paid up to some year later than income tax.
Other types of tax on property, such as stamp duty, are also due within Thirty days of the property sale being completed.
From the government’s perspective, the change indicates HMRC will get CGT receipts earlier.
But landlords may feel the pinch within their income. The move follows a number of other tax reforms which have pushed up bills for landlords, including the scaling back of mortgage interest relief, and the introduction of a stamp duty surcharge on buy-to-let and second homes.
When will the new rules enter into effect?
The new rules have yet to be confirmed, because the draft legislation is currently passing through Parliament. Should there be no changes towards the policy, the bill could pass into law come july 1st.
The change was originally due to come into effect in April 2022, but the proposals have been delayed and therefore are likely take effect for property disposals on or after 6 April 2022.
At this stage, there aren't any plans to change the deadline for other forms of CGT – though when the change is successful, it’s possible the deadline for paying CGT on shares, funds or other investments could be brought forward, too.
Your home might be repossessed if you don't keep up repayments in your mortgage.