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 the 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. It is imperative for taxpayers to 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 in an attempt 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) due to principal private residence relief, which plays a significant role in Property Taxation. However, suppose the property is an investment or hasn’t been exclusively used as a principal private residence during ownership. In that case, taxable capital gains may arise, requiring careful consideration of Property Taxation implications.
Effective from April 6, 2020, UK residents must make a payment on account for any CGT related to the disposal of residential property within 30 days of completion as part of the broader framework of Property Taxation regulations. The onset of COVID-19 prompted HMRC to adopt a more lenient stance, introducing temporary changes to facilitate compliance with the evolving rules.
To allow for the adaptation to the new rules, transactions completed between April 5 and June 30, 2020, had their CGT payment deadline extended to July 31, 2020, a crucial aspect in Property Taxation management. Late filing fees were waived if the transaction was reported and taxes were paid by this date, although interest still accrued. For sales completed on or after July 1, the 30-day rule is strictly enforced, emphasising the urgency and adherence required in Property Taxation processes.
Additionally, the disposal must be reported in the self-assessment return, due by January 31 in the tax year following the one where the gain occurred, allowing for the precise calculation of the CGT position for that tax year within the broader context of Property Taxation compliance.
In the past, CGT payment deferral was achievable through CGT deferment relief by investing in an Enterprise Investment Scheme (EIS), presenting an alternative dimension to Property Taxation strategies. However, with the introduction of the 30-day payment rule, if CGT arises from the disposal of a residential property, it may be necessary to pay the CGT upfront and then seek recovery if a later EIS investment is made, invoking CGT deferment relief, reflecting the evolving landscape and strategies within the realm of Property Taxation.
This emphasises the shift in the dynamics of 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, when a property that has been used as a principal private residence at some point during the ownership period is disposed of, the CGT reliefs available to reduce the taxable gain have been restricted. This is as a result of the modification of two rules:
- Lettings allowance has historically enabled taxable capital gains to be reduced by up to £40,000 where a property has, at some stage, been occupied as a principal private residence and for other periods has been let. The allowance is given in addition to principal private residence relief. From 6 April 2020, lettings relief is only available for periods when the owner and tenant share the occupation of the property. This means that many “accidental landlords” will no longer qualify for this valuable relief.
- Previously, the last 18 months of ownership of a property was treated as a period of occupation by the owner, even if the owner lived elsewhere during that time, provided the owner had, at some stage, occupied the property as a principal private residence. Since 6 April 2020, this ‘final period relief’ has been reduced to nine months (although it remains at 36 months for those who are disabled or selling their property to move into full-time care accommodation).
Property Taxation | The Stamp Duty Land Tax surcharge
These days, if a person who already owns a residential property purchases another, then a 3% stamp duty land tax (SDLT) surcharge will apply unless they are replacing their main residence. Typically, this situation will arise when a homeowner purchases a buy-to-let investment or a second home.
However, the SDLT surcharge can also apply when a person purchases to replace their main residence but cannot sell it simultaneously.
In such cases, the 3% SDLT surcharge must be paid on completion but is recoverable if the old residence is sold within three years of the purchase of the new residence. The problem has been that the impact of the COVID-19 restrictions on property transactions has meant that several people have been unable to meet the three-year sale deadline through no fault of their own. Those who find themselves in this position may take reassurance from HMRC’s updated guidance on exceptional circumstances, which allows applications for refunds to be made following a sale outside of the normal three-year limit where:
- The new property was bought on or after 1 January 2017, and
- The individual was unable to sell the previous property within three years because of reasons outside of their control, such as (but not exclusively):
- The impact of COVID-19 preventing the sale or
- An action taken by a public authority preventing the sale.
Once the reason for delay has ceased, the property must be sold as soon as is practicable to qualify for the relief.
Of course, following the Chancellor’s Summer Statement, there will be no standard SDLT on property purchases of up to £500,000 from 8 July 2020 until 31 March 2021. However, the 3% SDLT surcharge will still apply to additional residential properties in appropriate cases.
And on 14 July, it emerged that the Chancellor had written a letter to the Office of Tax Simplification (OTS) requesting it ‘undertake a review of CGT’. One of the points under review will be ‘the practical operation of principal private residence relief’. We may see some announcements on this in the Autumn Budget.