‘Unjust’ new system is hammering landlords and forcing them to guess their tax liabilities, critics claim.
It’s no secret that the last five years or so have been testing for the nation’s landlords.
A host of new rules have been introduced which make it rather tougher for people to make a few quid from investing in bricks and mortar.
There’s been the introduction of higher rates of Stamp Duty for purchases of second homes, the stripping back of the tax relief on offer, and even tougher affordability tests for landlords.
Now it’s emerged that the new way in which Capital Gains Tax (CGT) is handled is further penalising landlords, and putting them at risk of dramatically overpaying.
Your guide to paying less CGT is right here
The clock is ticking
Capital Gains Tax (CGT) is charged on the profits you make from selling certain assets, including property. It used to be the case that landlords could pay any CGT they owe at the end of the tax year.
However, since April last year a new system has been in place where landlords have to pay the tax due within 30 days of the transaction taking place.
That might seem simple enough in theory. But there is an added complication, in that the tax rate you are charged is dictated by your Income Tax band.
If you are a higher or additional rate taxpayer, then you have to pay 28% CGT on gains from any property you sell, while basic rate taxpayers pay 18% (so long as the gain from the sale doesn’t take them into a higher tax band).
And according to the accountancy experts at RSM, that’s causing a big issue.
I need a crystal ball
First of all, landlords are essentially having to guess what tax band they are going to be in at the end of the tax year.
That may be easier said than done, particularly in the current circumstances. And if it turns out that they have overpaid, they then have to go through the rigmarole of making a claim for a refund.
The idea that this is somehow an improvement on the old system is for the birds. Under the old system, the correct tax was paid, the only downside was the HM Revenue & Customs had to wait a while to get its hands on it.
Under the new system, we’ve sacrificed accuracy for the sake of HMRC getting hold of that cash quicker, with landlords essentially having to calculate their tax liabilities twice ‒ an initial estimate so that they meet that first 30-day deadline, and then a follow up at the end of the tax year once they can say with certainty what tax band they are in.
Waiting, waiting, always waiting
For some taxpayers, the situation could be even more infuriating. RSM gives the example of landlords who take the cautious approach and pay CGT at 28%, only to find later on that they have overpaid.
These same landlords, at the end of the tax year, find that they owe money to the taxman for their Income Tax and National Insurance.
A logical system might bring those two elements of the tax together, using that overpaid CGT to cover the other taxes due, and then if there is any money left a refund would be issued.
But RSM suggests this isn’t happening.
Instead, those landlords are having to cough up the cash for the Income Tax and National Insurance they owe, while manually requesting a refund for the overpaid CGT, essentially having to pay the same taxes twice and wait until the taxman sees fit to hand back the cash they are owed.
Elaine Shiels, partner of private client services at RSM, was spot on when she described the current set up as “unjust”, adding: “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.”
Hurry up and file
It’s worth highlighting how stringent HMRC is being in insisting that CGT is paid on time, even if you’re at risk of paying more than you should.
Figures released by the taxman should that more than 13,000 late filing penalties were sent out in the second half of last year to landlords and second homeowners who didn’t pay their tax within that 30-day window.
Those penalties quickly add up too ‒ the fines grossed HMRC more than £1.3 million.