Amidst the growing attention towards real estate acquisition, this piece serves as a refresher on noteworthy tax modifications pertinent to the taxation of residential property and related financial transactions since April 6, 2020. Additionally, it explores potential repercussions stemming from the ongoing COVID-19 pandemic.
As the landscape of property investments continues to evolve, understanding the intricacies of these tax adjustments becomes increasingly crucial for individuals navigating the dynamic property market.
Property Taxation| Mortgage interest relief
Since the fiscal year 2017/18, the higher-rate tax relief on mortgage interest has been gradually reduced. It diminished by 25% each year, and by April 6, 2020, it was fully eliminated. Instead, taxpayers now receive a basic-rate tax credit to offset their tax bills.
This change has significantly impacted landlords and property investors, as mortgage interest can no longer be deducted from rental income. Consequently, higher-rate tax relief is unavailable, which can increase taxable income.
Potential Tax Implications
Eliminating higher-rate tax relief may push an individual’s net income above critical tax thresholds. When this occurs, taxpayers face reduced allowances or increased liabilities, including:
- £100,000: Loss of the personal allowance.
- £50,000: High-income child benefit tax charge applies.
- £50,000: Relevant for higher-rate tax, including capital gains tax (CGT) and chargeable event gains on life policies.
- £200,000–£240,000: Triggers pensions annual allowance taper reduction.
As a result, taxpayers must plan carefully to avoid unintended financial consequences.
Financial Planning Strategies
Given the reduced deductions, proactive tax planning is crucial. Taxpayers should reassess their financial strategies to optimise their tax positions effectively. One effective strategy involves maximising pension contributions to lower net income.
However, the amount that can be contributed to pensions depends on individual circumstances. Moreover, taxpayers must be mindful of the pension annual allowance taper reduction rules. Understanding these rules is critical for accurate financial planning.
Key Takeaway
The removal of higher-rate tax relief has reshaped the tax landscape for UK landlords and higher earners. Adopting strategic financial measures is essential to minimise liabilities and safeguard allowances.
Property Taxation | The date of payment of CGT on gains arising from the disposal of residential property
Most residential property sales are exempt from CGT due to principal private residence relief. However, taxable capital gains may arise if the property is an investment or has not been exclusively used as a principal private residence. Understanding these scenarios is vital to managing property taxation effectively.
Introduction of the 30-Day CGT Payment Rule
From 6 April 2020, UK residents are required to pay CGT on residential property sales within 30 days of completion. This rule forms part of the broader property taxation framework. In response to the COVID-19 pandemic, HMRC introduced temporary measures to support compliance during the transition.
Temporary Extensions During COVID-19
For transactions completed between 6 April and 30 June 2020, the CGT payment deadline was extended to 31 July 2020. Late filing penalties were waived if payments and reports were submitted by this date. However, interest still accrued on unpaid taxes. After 1 July 2020, the 30-day payment and reporting rule was strictly enforced, emphasising the need for timely compliance.
Reporting CGT on Self-Assessment Returns
In addition to the 30-day rule, taxpayers must report disposals in their self-assessment return. This report is due by 31 January in the tax year following the gain. Accurate reporting ensures correct CGT calculations and compliance with property taxation obligations.
Changes to CGT Deferment Through EIS
Previously, CGT payments could be deferred by investing in an Enterprise Investment Scheme (EIS). This strategy allowed greater flexibility in property taxation planning. Under the new 30-day rule, CGT must often be paid upfront. Recovery can be sought later if an EIS investment qualifies for CGT deferment relief.
Evolving Property Taxation Strategies
Introducing the 30-day CGT payment rule highlights a shift in CGT payment strategies. Property taxation planning now requires greater attention to detail, timely action, and informed decision-making. Staying up-to-date with these changes is essential for effective tax management.
Property Taxation | Calculation of the relieved part of any gain
Since 6 April 2020, significant changes have been made to Capital Gains Tax (CGT) reliefs. These changes impact individuals selling properties that were once their principal private residence. The restrictions arise from modifying two key rules, which previously allowed property owners to reduce their taxable gains.
Lettings Relief Changes
Lettings relief has historically been a valuable way to reduce taxable capital gains. It allowed property owners to claim up to £40,000 of relief if the property had been both a principal private residence and let out during ownership. This relief was granted in addition to principal private residence relief, providing significant tax savings.
However, since 6 April 2020, lettings relief is only available when the owner and tenant share the property. This change excludes many “accidental landlords,” such as those renting out properties due to unforeseen circumstances, from qualifying for the relief. Consequently, fewer taxpayers can now access this benefit.
Reduction in Final Period Relief
Another critical change affects the “final period relief,” which previously treated the last 18 months of ownership as a period of deemed occupation. Under this rule, owners could still qualify for relief even if they had moved out, provided the property had been their principal private residence at some point.
From 6 April 2020, this relief has been reduced to nine months. Exceptions remain for specific circumstances, such as for individuals who are disabled or those selling their property to move into full-time care. For these groups, the final period of relief continues to be 36 months, offering much-needed flexibility in certain life situations.
Implications for Property Owners
These changes have substantial implications for UK property owners, particularly those with rental properties or second homes. Understanding the new rules is essential to accurately calculating CGT liabilities and avoiding unexpected tax bills. If in doubt, seek advice from a qualified tax professional or mortgage advisor.
Property Taxation | The Stamp Duty Land Tax surcharge
A 3% SDLT surcharge typically applies when buying an additional property unless replacing your primary residence. This is common for those purchasing buy-to-let properties or second homes.
However, this surcharge can also affect buyers replacing their main residence if they cannot sell the existing property simultaneously. In such cases, the surcharge must be paid at completion but can be refunded if the old property sells within three years.
COVID-19 restrictions significantly delayed many property sales, making it difficult for homeowners to meet this three-year deadline. Fortunately, HMRC has updated its guidance, allowing refunds for sales beyond the three-year limit in exceptional circumstances.
To qualify for a refund, the following conditions must be met:
- The new property was purchased on or after 1 January 2017.
- The previous property sale was delayed by circumstances outside the seller’s control, such as:
- COVID-19 disruptions.
- Actions taken by public authorities.
Once the reason for the delay has ended, the previous property must be sold as soon as practicable to secure the refund.
SDLT Relief and Recent Developments
Between 8 July 2020 and 31 March 2021, there was no standard SDLT on purchases under £500,000. However, the 3% surcharge remained applicable for additional properties.
On 14 July, the Chancellor asked the Office of Tax Simplification (OTS) to review Capital Gains Tax (CGT). This review includes the operation of principal private residence relief. Further announcements are expected in the Autumn Budget.
To avoid unexpected costs or missed relief opportunities, buyers should stay informed on SDLT policies, especially when purchasing additional properties.
Thank you for reading our publication “Property Taxation | Understanding Tax Adjustments Uncovered.” Stay “Connect“-ed for more updates soon!
