Capital gains tax: New rules will accelerate tax deadline for property sales

From 6 April 2020, the deadline for paying tax due on residential property gains will be effectively shortened for UK taxpayers. Capital gains tax is normally payable within 10-22 months from the date of the relevant asset disposal. However, under new rules, property owners will be required to pay the tax upfront within 30 days.

How do the new rules work?

For capital gains tax (‘CGT’), the general rule is that payment is due by the 31 January next following the tax year in which the gain arises (TMA 1970 s 59B(4)). For example, for a disposal which takes place on 6 April 2020 (tax year 2020/21), the tax is payable by 31 January 2022. This rule applies to all asset disposals.

However, the rules have been modified for property transactions (FA 2019 Sch 2 paras 3, 6, 17(2)) as follows:

1. Since 6 April 2019, non-UK residents have been required to file a return and make a payment on account within 30 days of completion. Completion means either when the property is transferred or if there is no conveyance, the date of disposal. For non-residents, payments on account apply to both commercial and residential property gains (FA 2019 Sch 2 para 1(1)(a)).
2. From 6 April 2020, the payment on account rules are extended to UK residents but only in respect of residential property gains (FA 2019 Sch 2 para 1(1)(b)).
3. The 31 January deadline is still relevant. The taxpayer’s total CGT for the tax year is assessed with any payments on account being deducted from the final bill. The final bill is also adjusted to reflect any overpayments.

So a buy-to-let investor who sells a property on 6 April 2020 no longer has the luxury of waiting until 31 January 2022 to discharge his CGT liability. Assuming that the transaction completes on the same day, he must file a return and pay the tax by 6 May 2020.

It is important to note that the payment on account rules only apply to those persons who are subject to capital gains tax. Individuals, trustees and personal representatives are affected but not companies subject to corporation tax. Note, however, that large companies with annual profits in excess of £1.5 million have their own payment on account regime which applies to all income profits and gains. These companies are required to pay their tax quarterly in advance (Corporation Tax (Instalment Payment) Regulations 1998 SI 1998/3175).    

Is it still possible to use options to defer the payment of CGT?

The new rules will impact the ability to use option arrangements to defer the tax due when property is sold at a gain. Option planning has proved to be particularly useful for transactions taking place towards the end of a tax year or accounting period. However, for certain transactions, this method will no longer be viable as a result of the obligation to pay the tax upfront.

The following examples illustrate how option planning is supposed to work (Example 1) and how the position will be affected when the payment on account rules come into force (Examples 2 and 3). In each case we assume that the parties to the transaction are UK resident.

Example 1: Florence and Zebedee (tax year 2018/19)

Florence owns a buy-to-let property which she is planning to sell to Zebedee for a sum of £600,000. The sale is to take place towards the end of the 2018/19 tax year, but Florence is concerned about the prospect of a large tax bill as the property stands at a substantial gain.

The parties are due to sign the contract on 31 March 2019. If the sale goes ahead, Florence will be required to pay CGT by 31 January 2020. However, by delaying the sale for a few days it is possible to extend the deadline by a further 12 months. This is achieved in the following way.

Step 1: Grant of options (tax year 2018/19)

On 31 March 2019, Florence and Zebedee grant each other cross options in respect of the property. The purpose of the options is to ensure that neither party can walk away from the deal before the sale contract is due to be signed a few days later. In particular:

1. Florence grants Zebedee a call option for a price of £60,000. The option gives Zebdeee the right to buy the property if it is exercised at any time during the period 6-30 April 2019. For CGT purposes, Florence is treated as having disposed of the call option rather than the underlying property to which the option relates. The deadline for payment would normally be 31 January 2020; however, this deadline is effectively overridden by the subsequent sale of the property in Step 2.
2. Zebedee grants Florence a put option for a price of £1. The option gives Florence the right to compel Zebedee to buy the property if it is exercised at any time during the period 6-30 April 2019. Zebedee is treated as having disposed of the put option, but since the price paid is nominal, there will be no tax to pay.

(TCGA 1992 s 144(1)).

Step 2: Sale of property (tax year 2019/20)

On 6 April 2019, Zebedee exercises the call option. This triggers into existence the contract for the sale of the property. Zebedee pays £540,000 on completion which takes place on 10 April 2019.

For CGT purposes, the option no longer has a life of its own but is subsumed into the disposal of the property which takes place when the sale contract comes into existence. Since this event takes place during the 2019/20 tax year, the deadline for paying the CGT is 31 January 2021. This deadline includes any tax that would otherwise have been payable in respect of the option granted by Florence in Step 1. This is because both grant and exercise of the option are treated together as a single transaction constituting the disposal of the property, with the option price being added to the sale consideration. Since the grant of the option is no longer regarded as a standalone asset disposal, the 31 January 2020 deadline for payment in Step 1 is ignored (TCGA 1992 ss 28, 144(2), CG12317).

Example 1 shows the position as it was before the payment of account rules were introduced for UK residents. What is the position if we fast forward by one year?

Option planning 2018-19Example 2: Florence and Zebedee (tax year 2019/20)

We use the same facts as in Example 1, but everything takes place exactly one year later. It is still the case that both grant and exercise of the option are treated as a single transaction, being the sale of the property. However, the deadline for payment is not as straightforward:

1. When Florence grants the call option on 31 March 2020, the payment on account rules have yet to come into force. The position is the same as in Example 1 except that the payment deadline for the option is shifted one year forward to 31 January 2021. As in Example 1, this deadline may be displaced when the property is sold.
2. However, by the time the property is sold on 6 April 2020, the payment on account rules come into play. Florence must now make an advance payment of the tax by 10 May 2020 (the 30-day period runs from completion which takes place on 10 April 2020).

The cashflow benefit of using an option to defer the tax is gone. Paradoxically, Florence is worse off than if she had sold the property outright on 31 March 2020. In these circumstances, no payment on account would have been required, and the deadline would have been 31 January 2021. Using an option effectively brings the deadline forward by several months.Option planning 2019-20This example shows that it is already too late in this tax year (2019/20) to use option arrangements to defer the tax to 31 January 2022. For option planning to work, the property sale must take place in the tax year after the option is granted. However, this necessarily involves the property sale taking place in the 2020/21 tax year when the payment on account rules come into force for the first time.

The position becomes more complicated when we fast forward by another year.

Example 3: Florence and Zebedee (tax year 2020/21)

This time, there are two payments on account to be made, as both option and property sale take place after 5 April 2020. The legislation specifically requires separate payments for each transaction even though they would normally be taxed together under general CGT rules. Accordingly:

  • a payment on account for the option granted on 31 March 2021 must be made by 30 April 2021 (since there is no conveyance, the 30-day period runs from the date of disposal)
  • the second payment in respect of the property sale must be made by 10 May 2021 (the 30-day period runs from the date of completion which takes place on 10 April 2021).

So Florence’s cashflow position is even worse than in Example 2. There is no point in using options at all, since the deadline has been brought forward even further.Option planning 2020-21So is option planning dead?

Not entirely. The position will depend on the status of the taxpayer and the type of property involved.

For UK residents subject to CGT, the payment on account rules only cover residential property; it is still possible to use options to defer gains on commercial property, whether let to tenants or otherwise used as a capital asset in the taxpayer’s business.

The payment on account rules do not apply to companies that pay corporation tax on their gains. However, for large companies there is no cashflow benefit in using options, since they are required to pay their tax in advance under the quarterly instalment system.

However, option planning is still possible for small and medium companies where the deadline for payment is 9 months and one day from the end of the relevant accounting period (TMA 1970 s 59D(1)). Options can be used to defer tax for both commercial and residential property disposals, with the transaction being structured around accounting periods rather than tax years.

The following table summarises which transactions may still benefit from the use of option arrangements.

Taxpayer

Residential property

Commercial property

UK residents paying CGT

No – payment on account within 30 days required

Yes – tax still due by the next 31 January following the year of disposal

Non-UK residents paying CGT

No – payment on account within 30 days required

No – payment on account within 30 days required

Large companies paying corporation tax

No – tax payable in advance under quarterly installment regime

No – tax payable in advance under quarterly installment regime

Small and medium companies paying corporation tax

Yes – tax due 9 months and one day after the end of the relevant accounting period

Yes – tax due 9 months and one day after the end of the relevant accounting period

 

Satwaki Chanda 157x157 Satwaki Chanda is a contributor to the Buy-to-Let Property Tax Handbook (Bloomsbury Professional). He is also the joint author of Corporation Tax 2020/21 and Capital Gains Tax Reliefs for SMEs and Entrepreneurs (Bloomsbury Professional).

 

Written by Satwaki Chanda

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