A quick refresher on Residential property tax issues

11 Jun 2021

Published in: Member News

At Copia Wealth & Tax, we have a significant number of clients with interest in residential property and with many changes to the tax system affecting this area, we have put together a timely reminder of the key issues.

Tax and residential property – what you need to know

Changes in taxation over the last few years have affected the following areas:

Principal Private Residence (“PPR”) Relief

The so-called “Tenant Tax”

Deadlines for paying capital gains tax on residential property sales.

PPR relief changes

The most recent changes came into play from 6 April 2020 and comprised the following:

Reduced final period exemption – where a property has been the main residence, the last 9 months of ownership counts as a period of “deemed occupation”, even if the property had during that time been left empty or alternatively, let to tenants. Note prior to 6 April 2020 this period was 18 months.

Changes to letting relief – the relief is the lesser of i) £40,000, ii) the gain attributable to the let period, and iii) the amount of private residence relief. After the changes from April 2020, this relief is limited to those situations where the owner remains in shared occupancy with the tenant, i.e., has lodgers living in the house. Thus, renting out the property to tenants whilst living elsewhere will no longer attract relief and so the main situation that used to attract this relief is now void.

Impact of the Tenant Tax

The Tenant Tax or Section 24 tax came onto the scene from April 2017 and set out to change the way in which landlords would calculate tax relief on mortgage interest and finance costs. As a result, mortgage, loan, and overdraft interest costs are only allowable for basic rate tax relief and are not included in calculating taxable rental income, whereas previously, on their rental properties, landlords were able to deduct the full cost of any mortgage interest payments in arriving at their taxable profit.

The changes were brought in on a phased basis over 4 years, starting from 5th April 2017. In the 2019/20 tax year, 75% of finance costs were restricted to 20% tax relief, rising to 100% by 2020/21 – so the impact of Section 24 has now peaked for the tax year just ended.

These changes have forced many UK landlords into a higher rate of tax despite their income not having increased, resulting in a reduction in cash flow and even, in some cases, turned properties into a loss-making position forcing potential sale. There have been issues for landlords originally within the 20% tax band who have been pushed into a higher tax bracket by these changes only to find discovered that child tax credit assessments and student loan repayments are adversely affected.

So, if you are a landlord with income near or above the 40% tax bracket (currently £50,270) and you have mortgages on your residential property portfolio you will need to consider if there any actions you can take, such as transferring properties to your spouse, to mitigate the impact. Incorporating your property portfolio is another option but the costs of this against the benefits need to be considered carefully.

CGT deadlines on residential property sales

Changes to the timing of any capital gains tax (“CGT”) payments that may be due from the future sale of residential property took effect from 6 April 2020 providing a requirement to pay any CGT within 30 days of completion of the property sale. Prior to this, it was possible to have up to a 22-month window to pay CGT. Alongside the revised payment date, there is also a requirement to file a new online property disposal return with HMRC within the 30-day period estimating the expected rate of CGT to apply to the gain that may need to be corrected when your next self-assessment tax return is prepared. If a disposal means there is no gain to report or if the gain made is covered by exemptions or losses, there is no requirement to complete a property disposal return.

Summary

Perhaps it is time to consider a review of your property portfolio to ensure the impacts of the above rule changes are understood and any potential mitigation is possible – as ever the Copia Wealth & Tax team is here to help just call us or make an enquiry through the website to book a review.

Submitted by Shaun from Copia Wealth & Tax
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