Tax experts warn that property investors in Scotland face an unexpected capital gains trap due to a little-known tax change.
Scottish accounting firm Douglas Home & Co has warned that many are struggling to reconsider their holdings despite being unaware that the timeframe for paying a capital gains tax (CGT) has changed.
The company believes thousands of homeowners and their attorneys are already headed for a tax shock without realizing it after selling second homes in the past 12 months.
Sheryl Macaulay
Tax planning specialist Sheryl Macaulay, and director of the company, urges law firms to forge alliances with accounting specialists to help resolve the problem.
She said, “People looking to sell, or have already sold, part of their real estate portfolio may find that they have to pay their CGT bill much faster than originally expected. The 30 day payment rule went into effect in April 2020 but has hardly been registered outside of the accounting world, some lawyers are simply not aware of it.
“Of course, most of their customers don’t know anything about it. In fact, we suspect that many people who have sold second homes in the past year are unaware of the increasing penalties if they fail to pay their CGT bill within 30 days. “
The changes were introduced with little fuss, and recent research showed that around 50,000 UK property tax returns had been filed by January 2021 – with more than a third missing the 30-day deadline. Those who fail to meet the deadline will face fines of up to £ 300 or 5% of the tax due, whichever is greater.
Sheryl added, “Even those attorneys who know about the change will still have trouble explaining what it means to their clients. That’s before they actually have to grapple with the complicated process.
“Any failure to report capital gains within the strict 30-day deadline will result in penalties for sellers. For law firms, it’s a stressful, costly, and bureaucratic burden – with the potential for clients to get angry if they find they haven’t been warned about this tax penalty.
“Perhaps the largest law firms with dedicated tax departments can easily handle this. But for the majority of small and medium-sized real estate attorneys, this is likely to be a major headache. “
Scotland has thousands of small investors with one or more rental properties as part of their nest egg. However, if they plan to sell to fund lifestyle changes after the pandemic, they may not realize the new tax obstacles that might await them.
The tax changes will affect sales of second homes and rental properties by UK residents. Taxpayers are now required to report all estimated CGT liabilities and make payment within 30 days of the property being sold.
Calculations can be complex due to a variety of variables, while filings must be digital, with setting up online accounts adding further levels of complexity.
Sheryl says Douglas Home & Co’s eight offices in Scotland and the north of England have many years of experience working with law firms. They now expect a rush of more applications as the new tax implications become more widely known.
She added, “A perfect storm is brewing. The real estate market is booming right when many investors are considering selling. Now it is precisely the people who will be hit by the time pressure to report capital gains.
“One must not think about how this could trip poorly prepared lawyers. It will get them in trouble and can lead to very dissatisfied customers if details are registered incorrectly or too late and they face penalties in addition to an unexpected tax bill.
“The whole process is far from easy, so it is advisable to work with tax experts as soon as possible. We can definitely help – and the sooner we get involved, the better.
“Not only do we make sure that new cases are handled properly, but we can also review property sales over the past few years and ensure that problems are minimized.”
Douglas Home & Co was founded and is headquartered in the Scottish Borders, where it has four offices with additional bases in Edinburgh, East Lothian, Cumbria and Northumberland. The company employs 70 people and posted sales growth of 4% to £ 4 million in FY 2020/21.
That keeps her on track with her ambitious business plan to close a gap in the market between smaller accounting firms and the big four. His ethos is to offer a more personal service than large companies, but a more extensive range of services than smaller practices.
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