Taxpayers Caught Out By 30-Day CGT Deadline

In April 2020 the new, and little known, Capital Gains Tax (CGT) 30-day deadline was introduced. And since that date it has thrown up a lot of issues for taxpayers, it does seem like it will need to be amended or perhaps even scrapped as it is simply unworkable or unfair in many scenarios.

The Office of Tax Simplification (OTS) published a report last month into the new CGT system recommending it be overhauled or, at the very least, updated to allow a 60-day deadline in certain circumstances. 

“For many taxpayers, 30 days is a very ambitious target — and it is clearly a cause for concern that a third of the returns that were filed took longer than 30 days to arrive. Many taxpayers only find out about their obligations after they have sold their property.” Excerpt from the report.

It’s almost as if this deadline has been introduced to catch taxpayers out and collect penalties… Previously, CGT was payable at the end of the year in a tax return. This meant that taxpayers had many months in which to declare and pay up what they owe. Importantly, taxpayers had time to calculate their CGT across a whole tax year, taking into account gains and losses, and utilising their tax-free allowance.

Penalties For Missing The CGT Deadline

HMRC have handed out over £1.3 million in penalties for late filing of CGT since the new rules came into effect in April 2020. And the picture looks even worse when you take into account the fact that for the first 6 months the £100 fine was waived as a sort of ‘soft’ approach to the introduction of this legislation. So in just 6 months, over 26,000 penalty notices have been issued, mostly to landlords and second home owners.

HMRC have said they will consider appeals for not filing on time if the taxpayer has a reasonable excuse, but these appeals are judged on a case-by-case basis.

CGT On Property Sales

The main issue with the 30-day deadline is that the sale of property is rarely an efficient process, in addition taxpayers are not experts in CGT matters. The OTS has also recommended that estate agents and conveyancers should distribute information about CGT to those selling property to help improve the situation, as well as extending the deadline to at least 60 days.

On average more than half of all property sales result in a taxable gain, and taxpayers just don’t have the awareness of the new rules and/or the full process is taking too long.

Divorce and Spousal Exemption

Another area struggling to meet the 30-day deadline is divorcing couples, who are usually able to claim spousal exemption on CGT when dividing their assets for at least the whole tax year in which they separate. However the average divorce takes a year to complete at the moment, and the 30-day tax window does not provide enough time to divide or dispose of their joint assets.  The OTS has recommended the deadline be extended to as much as 24 months for divorcing couples. 

One Tax Year To The Next

It appears that the online processes HMRC have put in-place cannot cope with CGT being owed in consecutive tax years. With the case of property most people will not buy and sell every year – but professional landlords or buy-to-let investors may very well have this situation to handle.

Reporting a taxable gain in consecutive tax years seems to throw up an incorrect calculation for the second year, and issue HMRC is aware of and are working on. In the meantime they’ve asked those in this situation to complete a paper return instead.

Being Prudent Can Cost You

A very good example of the issues paying CGT so soon after a gain was demonstrated recently in this Accountancy Daily article. tTax professional, Elaine Sheils, said:

“For example, consider a couple who sold a property in May 2020. At the time, they were unaware of their income levels for 2019/20. They took a prudent view of their capital gains tax (CGT) computations, paying tax at the higher rate of 28%. They completed their returns within 30 days, each making payment of their share of the taxes due to avoid a penalty. 

In the event, it turned out that the taxpayers had been too cautious and had overpaid CGT. However, once their income figures were finalised, they had to pay more income tax and national insurance.

HMRC is committed to the government’s agenda of digital by default. Self-assessment taxpayers will therefore know how payments of income tax, national insurance and CGT automatically filter into their tax accounts. Payments and liabilities will be set off against each other, and tax repayments generated where appropriate. So, in this hypothetical example, what happened to the overpaid CGT?

It is now emerging that, in these circumstances, HMRC is insisting that the additional income tax and national insurance liabilities must be paid in full. The overpayment of CGT can only be reclaimed by submitting an amended CGT return online. This feels unjust. If HMRC recognises the CGT overpayment, why will they not allow it to be set against other liabilities? Why should HMRC be entitled to charge interest and penalties on the income tax outstanding when overpaid capital gains tax has not been repaid?

The way in which HMRC’s CGT system has been designed means that – far from being digital by default – second and subsequent disposals require manual returns. What’s more, taxpayers find themselves having to overpay tax unnecessarily and then struggling to secure repayments from HMRC. This testifies to the inadequate design of the CGT system and augers very badly for the next round of making tax digital.”

If you’re in a situation where you may need to pay CGT within the new 30-day deadline and you anticipate issues, please speak to your accountant who can advise the best course of action.