HOUSE KEYS SUNSET

Property tax update for UK residential property landlords

Mark Stemp, Partner, Private Clients
01/03/2022
HOUSE KEYS SUNSET

There have been many residential property tax changes implemented by the government in the last few years. The changes are targeted to second home owners as well as landlords.

The current issues facing our clients are:

1. Capital Gains Tax (CGT) changes

Multiple residential property owners There were two main CGT changes in April 2020, with further changes from 27 October 2021:

  • CGT reporting in 60 days UK residents who sell their

UK residential property which results in a payment of CGT are required to report the disposal to HMRC within 60 days of the completion date. This time limit was extended from 30 to 60 days for completions after 26 October 2021.

  • Payment of tax in 60 days

Where there is a reporting requirement, the tax needs to be paid within 60 days of the completion date (prior to 27 October 2021 this limit was 30 days). Any payment on account will be deducted against the total income tax and CGT liability on submission of your self-assessment tax return in the tax year of the disposal.

When you sell a property in the UK, you can deduct your tax-free allowance from your total gain. The annual CGT tax-free allowance is £12,300 for the tax year 2021/22.

Couples jointly owning their property can combine their individual allowances, potentially allowing a gain of £24,600 before liability to pay CGT.

Losses made during the same tax year as gains need to be managed to ensure that they are available to reduce the gains subject to CGT.

2. Loan interest relief – Income Tax restrictions on dwelling related loans

Rules introduced from April 2017 exist to restrict the tax relief that can be claimed by higher rate tax payers who use loans to finance residential buy-to-let properties. The effect of these rules were phased in over a four year period.

From 2020/21 onwards, all financing costs incurred are disallowable in calculating the rental profit for the year and instead will be relieved as a basic rate tax reduction only in calculating your tax position.

Where the rental business does not generate a profit, or is covered by brought forward losses or by reliefs (personal allowance) from the 2020/21 tax year, the amount of mortgage interest costs is not utilised as a basic rate tax deduction. These unrelieved costs will be carried forward and relieved in future years where a taxable rental profit arises.

These rules can particularly impact owner managers whose income is paid in the form of dividends from their company, as tax relief is not available against taxes paid on investment income.

HMRC is known to send nudge letters to taxpayers on this subject, intended to prompt a review of the relief claimed to ensure it is correct.

Clients are taking action following the changes to loan interest relief and are considering the following:

  • ownership of the property
  • setting up Trusts
  • setting up companies (see later).

It is important to take advice to understand how these changes will affect you.

3. Stamp Duty Land Tax (SDLT)

Following the temporary increases in the SDLT nil rate band during 2021 for residential properties from 1 October 2021 the threshold reverted to the standard £125,000.

Reminder of different rates

There remain a number of different ways to calculate SDLT, which can give a better outcome than using the standard SDLT rates. They include:

  • Multiple Dwellings Relief (MDR) – available when a taxpayer purchases qualifying residential properties. It allows SDLT rates to be applied to the average value of the properties. See our article Multiple Dwellings Relief – Have you got a separate dwelling?
  • Mixed rates - When purchasing a mix of residential and commercial property, such as estates with outbuildings and shops with flats, it is possible to apply the non-residential rates of SDLT which are lower than the residential rates.

Repayment of the 3% surcharge

If you purchase a home before you are able to sell your existing home, you are required to pay a 3% SDLT surcharge. If you sell your former main residence within 3 years, you are able to re-claim the 3% SDLT paid. There is a time limit to make a claim:

  • 12 months from the date you sell your previous main residence; or
  • 12 months of the filing date of your SDLT tax return, whichever comes later.

4. Inheritance Tax for landlords and second home owners

Property is usually the most valuable asset class in a property owners’ estate on their death.  Inheritance Tax (IHT) at 40% on the value is typically paid on those with assets exceeding the nil rate band.  It is important to understand what would happen in the event of your death, both in terms of who is to inherit the asset but also the amount of tax to be paid by your estate. If you wish to estimate your IHT exposure please use our IHT calculator.

There are many planning ideas to consider, including gifting strategies.  More information can be found on our Inheritance tax hub.

5. Holding your rental business in a company

It can be advantageous to hold your property rental business in a company, and this is particularly attractive since the government has restricted the tax relief that can be claimed on financing costs, as the restrictions do not apply to limited companies.

Limited company profits are chargeable to corporation tax, currently at a rate of 19% (although due to increase to 25% from April 2023), rather than to income tax rates currently at 20% (basic rate), 40% (higher rate) and 45% (additional rate).

If the business owner chose to take profits out of the company, then, in addition to the company paying corporation tax on the rental profits, the director shareholder(s) would then also incur tax on extraction of the profits from the limited company, at either income tax rates if extracted by way of a salary, or dividend rates.

Dividend rate changes

Having remained at the same rate since April 2016, the rates of income tax charged on dividend income is set to increase by 1.25% from April 2022, as follows:

  Pre April 2022   Post April 2022
 Basic rate 7.5% 8.75%
Higher rate 32.5% 33.75%
Additional rate 38.1% 39.35%

There are advantages and disadvantages (such as increased administration costs) of holding your rental business in a company.  It is important to take advice in order to consider all aspects and make an informed choice based on your individual circumstances.

Some clients who own a portfolio of properties in their own name choose to incorporate their business.  This transfer to a company will have Capital Gains Tax and SDLT implications.  There are reliefs available in certain specific circumstances.

How can we help?

With property matters, it is always important to take tax advice due to the impact property has on all areas of taxation. There are opportunities for planning which can be taken advantage of every tax year. To discuss your individual circumstances and what options are available to you please get in touch with your Mark Stemp or your local Crowe contact.

Insights

We outline some of the things you may need to consider if you want to gift property to your children.
New rulings provide clarification on Multiple Dwellings Relief (MDR).
With the end of the financial year approaching, now is a good time for residential landlords to review their tax affairs.
We outline some of the things you may need to consider if you want to gift property to your children.
New rulings provide clarification on Multiple Dwellings Relief (MDR).
With the end of the financial year approaching, now is a good time for residential landlords to review their tax affairs.

Contact us

Mark Stemp
Mark Stemp
Partner, Private Clients
London & Thames Valley