Tax issues for residential property owners

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

The current issues facing our clients are:

1. Capital Gains Tax (CGT) changes from 6 April 2020

Multiple residential property owners

Prior to 6 April 2020 residential property sales were reported on the individual’s tax return for the year in which the contracts were exchanged. Submission of the tax return and payment of the tax were typically due on 31 January following the end of the tax year.

However, for any disposals where contracts are exchanged after 5 April 2020 the reporting and payment obligations have been amended to 30 days following completion of the sale.

Care needs to be taken as the ordering of disposals during the tax year are now important. Losses made during the same tax year as gains need to be managed to help ensure they can reduce gains, all of which needs to be reported and paid in the 30 days.  

As part of the new measures HMRC has introduced a soft landing period meaning that no penalties will be applied to late returns which are submitted before 31 July 2020. 

Landlords

Landlords who have let their property out as well as using it as a main residence could find that they are impacted by two new rules which were implemented in April 2020:

• Lettings relief has been severely restricted/removed, which can increase tax by up to £11,200 a person
• The Main Residence Relief final period has been reduced from 18 months to 9 months.

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

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

Since 2017 there has been an increase in the restriction for relief where landlords make interest payments to the bank. From 6 April 2020 the loan relief restriction was fully implemented which means higher rate or additional rate taxpayers will be able to claim tax relief at 20% of the interest paid whereas in the past relief would have been at their tax rate, typically 40% or 45%.

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.

The phasing of the restriction has meant many landlords have not been hit by the full relief restriction, which won’t be calculated and reported to HMRC until 31 January 2022. 

Clients are however taking action and considering the following:

• ownership of the property
• setting up Trusts
• setting up companies.

3. Do you have two residential properties you live in? 

The Capital Gains Tax (CGT) main residence rules still allow the taxpayer to choose which property is to be treated as a main residence and therefore tax free on disposal. 

There is however a short window, typically of two years, whereby this election needs to be made. If you have recently acquired a second home or have changed homes, it is important to take advice on how an election could benefit you.

4. Stamp Duty Land Tax (SDLT)

Ordinarily there is a three year window within which to reclaim the surcharged rate of SDLT (an additional 3% due on the purchase of additional property), where you have a qualifying sale of a previous main residence after the purchase. However, following an announcement in June taxpayers can now claim an extension to this window if there are ‘exceptional circumstances’ delaying the sale, and the sale then takes place as soon as practically possible. The extension is available to transactions whose three year window expires after 1 January 2020.

In the 2020 summer statement HMRC have also announced a temporary increase on the ‘nil rate band’ for SDLT from £125,000 to £500,000. This new band will be available for transactions completing between 8 July 2020 and 31 March 2021. 

5. Inheritance Tax

Clients generally consider gift of properties on to their children to help save Inheritance Tax (IHT), typically when surviving the gift by 7 years. Such a gift can trigger CGT and SDLT. It can be more tax efficient to consider trust structures instead of a direct gift as it is possible to defer payment of the CGT.  

It is important to take advice to understand the tax impact of the gifts being made by you.

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 better understand your tax position and what options are available to you please get in touch with your local Crowe contact.