There have been a number of changes over recent years impacting both UK Resident and Non-UK Resident property owners and landlords.
For both existing landlords and those who plan to start out in property, it is important to be aware of the impact of the rules and seek advice when undertaking property transactions such as; making purchases, sales, gifts or transfers. In addition, for those who have been landlords for some time, it may be wise to take stock of their property portfolio and fully understand their tax exposure.
Rules impacted by recent changes that landlords will need to consider:
- No more Lettings Relief – Previously providing up to £40,000 of relief against capital gains tax (CGT), £80,000 for joint owners, of a property once used as their main residence, this has now ceased.
- Reduction of Principal Private Residence Relief -The last 18 months of ownership previously exempt from CGT is now reduced to 9 months.
- Non-UK Resident Company’s change of tax regime - Non-UK Resident companies that carry on a UK property rental business will now be subject to corporation tax and not income tax.
- 30 Days to pay CGT and submit the tax return - For residential property sales.
- Non-UK Resident Landlords - Already fall within this 30-day regime and in April 2019 it was extended to apply to direct and indirect disposals of all UK land, not just residential property.
- Rent a Room Relief - If a room in a person’s main home is rented out, there are rules which can provide tax relief of up to £7,500 on the rents received, if conditions are met.
- 3% Stamp Duty Land Tax (SDLT) Surcharge - This will usually apply on top of the normal rate if an individual is buying a residential property that means they will own more than one property. For companies and trusts the 3% surcharge applies on the purchase of the first property.
- 2% Stamp Duty Land Tax (SDLT) Surcharge – From 1 April 2021 a new surcharge was introduced for Non-UK Residents acquiring property in England and Northern Ireland.
- Mortgage/Finance Interest Restrictions – With the rules fully phased in, all financing costs incurred by a landlord will be given as a basic rate relief only and higher rate tax relief will be lost.
Tax Traps - When landlords and property owners can get caught out
- Property Ownership - A misunderstanding of the ownership is unfortunately very common and it is very important. Property owners should look to understand how they own property and where income is declared, as this is an area HM Revenue and Customs do investigate. Married couples and civil partners need to complete certain documentation if they wish property to be taxed differently than 50/50, which is the automatic tax position without this paperwork. This is even where property has been acquired as tenants in common in a ratio other than 50/50.
- Gifts of Property - Unless this is between a married couple or civil partners, where property is gifted the person making the gift is subject to capital gains tax as if they had received proceeds equivalent to the property’s market value, even if no consideration is received.
- The order of transactions - Tax advisers will often stress the importance of planning the timing and the order of transactions. An example; (pre and post the SDLT holiday), an adult child missing out on first time buyer’s relief for SDLT, because family members had previously gifted them property. Had the adult child acquired their first home, and then been gifted property, they would have benefited from this relief saving up to £5,000. In addition to this, not only is first time buyer’s relief lost but they would have also have had to pay the 3% supplement.
- SDLT and married couples/civil partners - Whilst properties can be transferred free of capital gains tax for those who are married or in civil partnerships, if property has lending and this is also transferred, SDLT can arise on the value of the debt transferred. SDLT on debt in general is often overlooked and where any debt in relation to a property is due to be transferred, released or assumed, SDLT should be considered.
- Finance Interest Restrictions - The change in rules means an individual’s income will increase as they can no longer deduct finance costs from their rental income as a standard expense, but instead can only receive a 20% tax credit from the tax due. This could have adverse consequences in addition to the individual’s income tax bill going up, such as the loss of child benefit, loss of personal allowance and hitting the higher rates of tax bracket.
Tax Tips – When landlords and property owners can benefit from planning and tax reliefs
- Purchase of properties with an annex - When the 3% SDLT supplement was first introduced, annexes were caught by this, however this rule has since been revised and many have unknowingly paid the supplement and can seek repayment.
- Acquiring multiple properties - Additionally, when acquiring properties or a property that comprises of more than one dwelling, for example it includes an annex, a relief can be claimed which can provide significant SDLT savings and again is often over looked and misunderstood.
- Incorporation of a property business - Many landlords will be considering the structure in which they own their property business, given all of the recent changes to the rules. Incorporation can provide a number of tax benefits both short and longer term and this planning should be considered with careful advice to ensure the tax reliefs can be claimed and all the benefits of the incorporation are fully understood.
- Married couples and civil partners - Can benefit from the transfer of property free of capital gains tax and can therefore consider the most tax efficient way to hold property together.
- Principal Private Residence Relief - If you are developing land within the grounds of your main home, seek tax advice before the spade hits the ground to ensure you retain PPR relief.
How we can help
There are many ways in which property can be held and multiple tax implications of owning property. This summary highlights some of the key changes for residential property specifically, and provides some examples of traps and tips that landlords need to be aware of, but it is by no means exhaustive.
If you are a landlord who has built a property business over the years, we would recommend you take stock to ensure you are fully aware of your tax position and the options available to you, remembering a property business is not exempt under Business Property Relief for Inheritance Tax purposes.
If you are new to the property scene then seeking advice as to how you acquire your first property and providing your thoughts on future plans is vital, to ensure you are on the correct path.
For further information please email firstname.lastname@example.org