Capital Gains Tax: Payment window for residential property gains (payment on account) Response by the Chartered Institute of Taxation 1 Introduction 1.1 This Stage Two 1 consultation follows the government s announcement in the 2015 Autumn Statement that CGT will become payable on gains from selling residential property within thirty days of completion, with effect from April 2020 2. The consultation seeks views on the technical detail. The payment within thirty days will be a payment on account to be credited against the person s income tax and capital gains tax liability for the tax year. A payment on account return will also be required within the same timescale. 1.2 The existing CGT payment on account system for non-residents disposing of UK residential property will be extended from April 2020 so that a payment will be due within thirty days irrespective of whether a person also makes self-assessment returns to HMRC. 1.3 The changes will mainly affect those disposing of a second home or rental property. They will not apply where a gain is not chargeable to CGT. The main example of a disposal that is not chargeable to CGT is the sale of an individual s only or main residence that is not chargeable because of private residence relief (PRR). 1.4 The government will publish a response in summer 2018 with draft legislation that will be introduced in the Finance Bill 2019. 1.5 As an educational charity, our primary purpose is to promote education in taxation. One of the key aims of the CIOT is to work for a better, more efficient, tax system for all affected by it taxpayers, their advisers and the authorities. Our comments and 1 Stage Two of the consultation process is Determining the best option and developing a framework for implementation including detailed policy design 2 The original announcement was that the measure would take effect from April 2019. The date was deferred to April 2020 in the 2017 Autumn Budget.
recommendations on tax issues are made solely in order to achieve this aim; we are a non-party-political organisation. 1.6 Our stated objectives for the tax system include: A legislative process which translates policy intentions into statute accurately and effectively, without unintended consequences. Greater simplicity and clarity, so people can understand how much tax they should be paying and why. A fair balance between the powers of tax collectors and the rights of taxpayers (both represented and unrepresented). A responsive and competent tax administration, with a minimum of bureaucracy. It is with these particular objectives in mind that we respond to this consultation. 2 Executive summary 2.1 We are disappointed that consultation is taking place at Stage Two of the consultation process omitting Stage One entirely. The CIOT would have welcomed the opportunity to provide input at Stage One: doing so would have allowed more time to consider concerns relating to implementation. 2.2 A significant practical difficulty is that it may not be possible to establish the applicable rate of tax within thirty days of completion. A possible solution might be to provide for the option to apply a flat percentage of the proceeds. Such an option may assist taxpayers with lower value transactions where compliance is practically impossible within the timescale because, for example, of the need for a professional valuation. 2.3 Consideration might be given to retaining CGT payable in respect of gains attributable to the disposal of a main residence that is covered in part by private residence relief wholly within the self-assessment process rather than being subject to the thirty-day reporting and payment on account. Such an approach would appear to accord with the indication that the changes will mainly affect those disposing of a second home or rental property. 2.4 Timely communication of the changes, in advance of their implementation, will be of central importance. Communication should be extended not only to the tax pages of GOV.UK and to taxpayers already within self-assessment but also disseminated via professional bodies whose members are involved in valuation and conveyancing processes, and to GOV.UK pages dealing with land registration. 2.5 No adjustment to the amount paid on account will be allowed for subsequent losses that arise on disposals that are not residential property. The failure to provide a means to adjust the payment on account in these circumstances seems inequitable. The justification for not doing so is complexity. We suggest that the balance between fairness and complexity in these circumstances should be reassessed. Technical/subsfinal/CGT/2018 2
2.6 The longer time period 3 allowed for payment of corporation tax on gains arising on the disposal of residential property may have the (presumably) unintended consequence of helping to promote the tax benefits of incorporation. 3 Consultation process 3.1 We are disappointed that consultation is taking place at Stage Two of the consultation process omitting Stage One entirely. Having the opportunity to be involved at Stage One would have allowed the CIOT more time to consider the significant practical hurdles for implementing this policy. 3.2 The updated guidance 4 on the new consultation timetable underlined the government s commitment to consulting with stakeholders at early stages of policy making. 4 Question 1: Are there areas where the proposed scheme for UK residents could be improved to make it easier for taxpayers to comply? 4.1 The applicable tax rate Paragraph 3.8 of the consultation notes that in calculating the amount of CGT for the payment on account, the rate of tax will be the applicable rate of tax normally 18% or 28% or both. However, a significant practical difficulty will be establishing the rate that will be applicable for the individual. It is not clear from the consultation how the appropriate rate should be ascertained, or how in practice the rate might be established with any accuracy where future income/gains may fluctuate. 4.2 One possibility would be to apply a flat rate to the gain. However, it will be difficult to establish an average flat rate given that the applicable rate could vary from 10% 5-28%. An alternative solution might be to provide for the option to apply a flat percentage of the proceeds. The advantage would be to allow taxpayers who have been unable to establish historical information or valuations within the thirty-day time limit to meet their compliance obligations albeit with advance payment at a higher effective rate than the final amount due. It is likely to be of most assistance in lower value transactions where compliance is practically impossible within the timescale because, for example, of the need for a professional valuation. 4.3 Effect of reliefs The consultation does not address the effect of relevant reliefs. There are therefore questions that arise in relation to reliefs that may apply in respect of residential property. 4.4 Roll-over relief under TCGA 1992 section 162 is given automatically without the need for a claim (unless an election is made under section 162A). Will the chargeable 3 For companies with taxable profits of up to 1.5 million 4 Published 6 December 2017 5 In the case of a furnished holiday let eligible for Entrepreneurs Relief Technical/subsfinal/CGT/2018 3
gains on the disposal that are treated as reducing the base cost of the shares be ignored for the purposes of the thirty day reporting and payment obligations? 4.5 A claim is required for disposals otherwise than at arm s length (gift relief) under TCGA 1992 section 165/ section 260. Will it be possible to take into account a future claim for the payment on account and thirty-day return? 4.6 Payment by instalments There is no mention of the interaction with TCGA 1992 section 281 (Payment by instalments of tax on gifts by election) where a person becomes entitled to trust property and in respect of which a valuation is likely to be required. 4.7 Private residence relief The changes will not affect those disposing of a main residence where the gain is wholly within PRR. In the case of partial relief, the application of PRR can be complex requiring taxation advice or professional valuation, for example in relation to: non-qualifying tax years; other periods of absence; owning two or more residences; using part of the property for business; lettings; land exceeding the permitted area of half a hectare or more than required for reasonable enjoyment requiring an apportionment of the gain. Unrepresented taxpayers in these circumstances may not be aware until late in the conveyancing process that the disposal of their main residence will not be fully covered by PRR exposing them to penalties and interest because the reduced timescale does not allow for sufficient time to take advice and/or obtain a professional valuation. Consideration might be given to retaining CGT payable in respect of gains attributable to the disposal of a main residence that is covered in part by private residence relief wholly within the self-assessment process rather than being subject to the thirty-day reporting and payment on account. Such an approach would appear to accord with the indication (at paragraph 1.4 of the consultation) that the changes will mainly affect those disposing of a second home or rental property. 4.8 Long delay between exchange and completion Paragraph 3.16 considers the position where the date of disposal (that is, the date of exchange of contracts that determines the reporting requirement for the selfassessment return) and the date of completion or payment on account fall within different tax years. It notes that the making of the payment on account does not change the tax year in which the disposal is made. However, a long delay between exchange and completion could result in the tax falling due on 31 January following Technical/subsfinal/CGT/2018 4
the year of assessment in which the disposal is made, a date that is earlier than the payment on account date. Although such circumstances may be relatively uncommon, it should be a situation that is addressed. 4.9 The importance of effective communication of the change Interest will be charged on late payments and the penalties for late filing of the payment on account return will also apply. Although there will generally be no requirement to file a payment on account return when no CGT is actually due (unlike the current regime for NRCGT see our later comments), recent cases in relation to penalties for failure to make an NRCGT return within thirty days has demonstrated a lack of awareness of the NRCGT reporting requirements by non-uk residents. It highlights the importance of communicating the changes widely not only on GOV.UK and to taxpayers already within self-assessment but also disseminated via professional bodies whose members are involved in valuation and conveyancing processes. 4.10 A further suggestion is to notify the new reporting/payment requirement as part of the HM Registry Form TR1, or at least on the relevant pages of GOV.UK dealing with the TR1. 4.11 Timely communication to taxpayers well in advance of the changes should certainly emphasise the practical consequences of the change; historical details of previous transactions, relevant valuations, acquisition costs and improvements will need to be to hand well in advance of the disposal in order to meet the new deadlines. Taxpayers will also need to ensure they have the funds available to make the payment within thirty days particularly when a gift of the property is involved rather than a cash sale. 4.12 In addition, the penalties and interest position for non-compliance needs to be well publicised. One aspect that is not clear from the consultation is the extent to which the payment on account return can be amended without penalty. 4.13 Overseas property Paragraph 3.6 of the consultation indicates that a payment on account will not need to be calculated on the disposal of an overseas residential property by a UK resident where it is expected that a foreign tax liability arises in respect of which there is double tax relief. It does not appear necessary that the foreign tax fully franks the UK liability. However, it is unclear to what extent a foreign tax liability will pre-empt the need for a payment on account. 4.14 A payment of account will not be required where the gain will be taxed on the remittance basis (paragraph 3.6 of the consultation confirms). Will the thirty-day payment and return be required if/once the proceeds are remitted and, if so, will the mixed fund rules apply to identify the gain? 4.15 Terminology The use of the term payment on account risks causing confusion with the income tax payments on account. An alternative term might be advance payment. Technical/subsfinal/CGT/2018 5
5 Question 2: Does the proposed treatment of losses on disposals of residential property and disposals of other assets strike the right balance between simplicity and fairness? If not what alternative approach would you propose? 5.1 Unused capital losses brought forward and the annual exemption can be deducted in calculating the CGT payment on account due on a disposal of residential property. If a loss arises from a subsequent disposal of another residential property in the same tax year, the taxpayer will be able to make a claim for repayment on the grounds that the later loss will be offset against the earlier gain. However, subsequent losses arising on other assets in the tax year after the residential property disposal cannot be offset, other than in the self-assessment tax return. It will be possible therefore that a payment on account on a residential property gain will be made in the tax year that is offset or eliminated by a larger loss on another chargeable asset. However, paragraph 3.21 of the consultation indicates the amounts paid on account in these circumstances will not be repayable until the self-assessment return has been filed to avoid undue complexities. 5.2 The failure to provide a means to adjust the payment on account in these circumstances seems inequitable. The justification for not doing so is said to be complexity. We strongly urge you to reconsider the balance between fairness and complexity in relation to this issue. 6 Question 3: Are there areas where the scheme for non-residents could be improved to make it easier for taxpayers to comply? 6.1 The changes to the rules for non-residents includes a sub-heading of Alignment with UK residents. As part of the alignment we suggest that consideration should be given to removing the obligation to file a return within thirty days of the disposal where the gain is not chargeable, or chargeable under the separate ATED-related CGT rules and filing regime. 6.2 The current NRCGT regime provides some relaxation for non-chargeable disposals, for example, the reporting requirement is elective for no gain/no loss disposals (such as between spouses), and the grant of a lease for no premium to a third party 6. However, a return for NRCGT is still required in circumstances where no NRCGT is due (as a result of PRR) or where the gain falls wholly within ATED-related CGT and the associated filing regime. 7 Assessment of impacts 7.1 As the assessment notes, UK companies chargeable to corporation tax on gains are not affected. The longer time period 7 allowed for payment of corporation tax on gains arising on the disposal of residential property may have the (presumably) unintended consequence of helping to promote the tax benefits of incorporation for taxpayers 6 TMA 1970 section 12ZBA (2) 7 For companies with taxable profits of up to 1.5 million Technical/subsfinal/CGT/2018 6
who hold a portfolio of buy to let investment properties and wish to ensure the interest paid on debt secured on the properties attracts full tax relief. 8 Acknowledgement of submission 8.1 We would be grateful if you could acknowledge safe receipt of this submission, and ensure that the Chartered Institute of Taxation is included in the List of Respondents when any outcome of the consultation is published. 9 The Chartered Institute of Taxation 9.1 The Chartered Institute of Taxation (CIOT) is the leading professional body in the United Kingdom concerned solely with taxation. The CIOT is an educational charity, promoting education and study of the administration and practice of taxation. One of our key aims is to work for a better, more efficient, tax system for all affected by it taxpayers, their advisers and the authorities. The CIOT s work covers all aspects of taxation, including direct and indirect taxes and duties. Through our Low Incomes Tax Reform Group (LITRG), the CIOT has a particular focus on improving the tax system, including tax credits and benefits, for the unrepresented taxpayer. The CIOT draws on our members experience in private practice, commerce and industry, government and academia to improve tax administration and propose and explain how tax policy objectives can most effectively be achieved. We also link to, and draw on, similar leading professional tax bodies in other countries. The CIOT s comments and recommendations on tax issues are made in line with our charitable objectives: we are politically neutral in our work. The CIOT s 18,000 members have the practising title of Chartered Tax Adviser and the designatory letters CTA, to represent the leading tax qualification. The Chartered Institute of Taxation 5 June 2018 Technical/subsfinal/CGT/2018 7