Property tax update

Residential property and second home owners

Mark Stemp, Partner, Private Clients

Stamp Duty Land Tax (SDLT)

Temporary increase in the SDLT nil band

The temporary increase in the SDLT nil rate band for residential properties from £125,000 to £500,000 has been fuelling the property market over the last couple of months. This increase to the nil rate band ends on 30 June 2021.

From 1 July 2021 to 30 September 2021 the nil rate band will be reduced to £250,000 and then from 1 October 2021 the threshold will revert to the standard £125,000.

Reminder of different rates

There are still a number of different ways to calculate the SDLT. These can also give a better outcome than using the standard SDLT rates. They include:

  • Multiple Dwellings Relief (MDR) – this relief is available when a taxpayer purchases qualifying residential properties. It allows SDLT rates to be applied to the average value of the properties rather than total purchase price. 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.

Capital Gain Tax (CGT)

There were two main CGT changes in April

  • CGT reporting in 30 days

From 6 April 2020, UK residents who sell their UK residential property which results in a payment of CGT are required to report it to HMRC within 30 days of the completion date.

  • Payment of tax in 30 days

Where there is a reporting requirement, the tax needs to be paid within 30 days of the completion date. Any payment on account will be deducted against your 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.

Income tax relief on mortgage interest for landlords

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 will be disallowable in calculating the rental profit for the year and instead will relieved as a basic rate tax reduction only in calculating your tax position.

In case your rental business did not generate a profit or is covered by brought forward losses or by reliefs (personal allowance) for the 2020/21 tax year, the amount of your mortgage interest costs is not being utilised as a basic rate tax deduction. As you are unable to utilise all of the mortgage interest costs in this way for 2020/21, these unrelieved costs will be carried forward and relieved in future years where you have taxable rental profit.

Inheritance Tax for landlords and second home owners

Property is usually the largest 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.

How can we help?

There are a number of factors to be considered when you own, buy or sell your residential property in the UK, we recommend you seek professional advice as some of the parts can be complex.

For more information on the issues discussed in this article or to discuss your individual circumstances get in touch with Mark Stemp or your usual Crowe contact.

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