Property Taxation
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 fiscal year 2017/18, higher-rate tax relief on mortgage interest has been gradually eliminated, diminishing by 25% each tax year. This has been supplanted by a reduction in the taxpayer’s tax bill through a basic-rate tax credit.
As of April 6, 2020, the transitional reduction process has reached its culmination. Consequently, no deduction for mortgage interest from rental income is permissible, rendering higher-rate tax relief unavailable. 
Beyond the denial of tax relief at higher rates, this shift could lead to an elevation of an individual’s net income beyond crucial thresholds, resulting in the loss or reduction of tax allowances and thereby imposing a higher tax liability. These critical thresholds include:
Furthermore, this alteration underscores the importance of meticulous financial planning, as individuals may now navigate a tax landscape with limited deductions and heightened liabilities. Taxpayers must reassess their financial strategies and explore alternative avenues for optimising their tax positions in light of these recent changes.
- £100,000 (personal allowance),
- £50,000 (high-income child benefit tax charge),
- £50,000 (higher rate tax – relevant for capital gains tax (CGT) and chargeable event gains on life policies), and
- £200,000 and £240,000 (pensions annual allowance taper reduction).
Taxpayers affected by these rules should consider maximising pension contributions to reduce net income.
How much a person may be able to pay in pension contributions will depend on that person’s circumstances. It’s important to note that there are specific rules around calculating the thresholds for the pension annual allowance taper reduction.
Property Taxation | The date of payment of CGT on gains arising from the disposal of residential property
Most residential property sales are exempt from Capital Gains Tax (CGT). This exemption is due to principal private residence relief. However, taxable capital gains may arise if the property is an investment or not used exclusively as a primary residence. This requires careful consideration of the implications of property taxation.
Effective April 6, 2020, UK residents must make a CGT payment on account within 30 days of completion. This is part of the broader Property Taxation regulations. The onset of COVID-19 prompted HMRC to adopt a more lenient stance, introducing temporary changes to facilitate compliance.
COVID-19 Adjustments to CGT Rules
To allow for adaptation to the new rules, transactions completed between April 5 and June 30, 2020, had an extended CGT payment deadline. The new deadline was July 31, 2020, a crucial aspect of Property Taxation management. Late filing fees were waived if the transaction was reported and taxes paid by this date, although interest still accrued. For sales completed on or after July 1, the 30-day rule is strictly enforced. This emphasises the urgency and adherence required in Property Taxation processes.
Reporting Requirements and Self-Assessment
Additionally, the disposal must be reported in the self-assessment return due by January 31. This applies to the tax year following the one where the gain occurred. This allows for precise calculation of the CGT position within the broader context of Property Taxation compliance.
Deferral and Enterprise Investment Scheme
In the past, CGT payment deferral was achievable through CGT deferment relief by investing in an Enterprise Investment Scheme (EIS). This presented an alternative dimension to Property Taxation strategies. However, with the introduction of the 30-day payment rule, if CGT arises from property disposal, it may be necessary to pay upfront. Recovery can be sought if a later EIS investment invokes CGT deferment relief.
Evolving CGT Payment Strategies
This reflects the evolving landscape and strategies within Property Taxation. It emphasises the shift in CGT payment strategies, especially in the context of Property Taxation planning.
Property Taxation | Calculation of the relieved part of any gain
Since 6 April 2020, the CGT reliefs for properties used as principal private residences have been restricted. This change results from modifications to two key rules.
Firstly, the allowance for lettings has been significantly altered. Historically, this allowance reduced taxable capital gains by up to £40,000. This applied if the property had been both a principal private residence and let out at different times. The allowance was granted in addition to principal private residence relief. However, from 6 April 2020, lettings relief is only available when the owner and tenant share the property. Consequently, many “accidental landlords” no longer qualify for this valuable relief.
Secondly, the final period relief has been reduced. Previously, the last 18 months of ownership were treated as a period of occupation by the owner, even if they lived elsewhere during that time. This was contingent on the property being a principal private residence at some point. Since 6 April 2020, this final period of relief has been cut to nine months. However, it remains at 36 months for those who are disabled or selling their property to move into full-time care accommodation.
These changes impact the UK mortgage market, particularly affecting those who let properties temporarily. Property owners must understand these new rules to manage their tax liabilities effectively. Thus, staying informed about these regulations is crucial for all property investors.
Property Taxation | The Stamp Duty Land Tax surcharge
If you own a home and buy another, a 3% SDLT surcharge applies. This does not apply if you are replacing your main residence. Typically, this arises when buying a buy-to-let investment or a second home.
SDLT Surcharge on Replacing Main Residence
The SDLT surcharge also applies if you buy to replace your main residence but can’t sell it simultaneously. In such cases, you must pay the 3% surcharge on completion. You can recover it if you sell the old residence within three years of buying the new one.
COVID-19 Impact on SDLT Surcharge Recovery
COVID-19 restrictions have delayed many property transactions. As a result, some couldn’t meet the three-year sale deadline. HMRC’s updated guidance offers reassurance. You can apply for a refund if exceptional circumstances prevented the sale within three years.
Eligibility for SDLT Surcharge Relief
To qualify:
- The new property must be bought on or after 1 January 2017.
- You couldn’t sell the old property within three years due to reasons beyond your control, such as COVID-19 or public authority actions.
Once the reason for the delay ceases, you must sell the old property as soon as possible.
Chancellor’s Summer Statement on SDLT
From 8 July 2020 to 31 March 2021, there will be no standard SDLT on property purchases up to £500,000. However, the 3% surcharge will still apply to additional residential properties.
Chancellor’s Letter to the OTS
On 14 July, the Chancellor requested the OTS to review CGT. One review point is the operation of principal private residence relief. We might see announcements on this in the Autumn Budget.