Monday 6 April sees some residential property tax changes coming into effect that landlords, property investors and second homeowners need to prepare for. Changes to when Capital Gains Tax (CGT) must be paid and the removal of mortgage interest relief have been agreed. Reduced tax relief on sales (Principal Private Residence relief or PPR) and reforms for Lettings relief are also likely to be introduced.
If you are a landlord or property investor, you may want to take steps to minimise the impact of the coming changes. They mainly affect those wishing to sell their properties or have second homes.
Capital Gains Tax (CGT)
At the moment, you can pay the CGT due following the sale of a property at your next annual tax assessment. From April, this changes, and you’ll have to file a return and pay the tax due on the sale of the property within 30 days.
If you’re thinking about selling, it might be worth doing it in the current tax year (2019/20). The tax on the sale won’t be payable until January 2021. The same thing goes if you’re considering gifting your property, for example, to your children.
If you’re an investor with shares that are making a loss, you could sell them before you sell your property and reduce your CGT liability.
Mortgage Interest Relief
The last stage of a three-year phased reduction of mortgage interest relief will come into effect in April. Whereas you used to be able to claim mortgage interest as a business and reduce your tax bill, this will now be restricted to basic rate tax relief (20%).
The change will mainly impact higher and additional rate taxpayers whose rental properties have a high loan-to-value ratio. If you fall into this bracket, you may want to consider selling or transferring ownership of properties or reducing your mortgage.
The interest restrictions do not currently apply to companies.
Principal Private Residence Relief (PPR)
Current PPR rules mean anyone who is selling their house doesn’t have to pay CGT on the sale. It also applies to those who sell a property that they used to live in as their primary residence.
At the moment, you have 18 months to sell your property after you move out before you must pay CGT due on the sale. This rule applies whether or not you are currently renting it out.
The Government is looking to reduce this period to nine months if you sell your property after 6 April 2020. If you are looking to dispose of your property, doing it before the April deadline will save you that extra nine months of gain.
The PPR changes will catch out those who are ‘accidental landlords’, for example, if you want to move home but can’t sell your original property. They will also affect couples who have separated and bought new properties before the family home is sold.
Those entitled to PPR relief may well receive a double whammy in April when Lettings relief rules change. At the moment, if you are renting out a property that used to be your main residence, you can get up to £40,000 tax relief. If you are a couple, the figure is £80,000.
From April, you can only claim relief if you live in your property when you sell it and you have a tenant living with you.
The change can potentially add £11,200 to your tax bill if you currently benefit from the full £40,000 relief.
Deductions from CGT
You’ll still be able to deduct certain expenses or costs from your CGT liability. Stamp duty and solicitors and estate agents’ feels remain deductible, as do the costs of improving your property – for example, building an extension.
You can’t deduct regular maintenance and repair costs from CGT. Some landlords, such as Buy-To-Let, may be able to deduct them from their rental income.
Property tax for limited companies
Typically, CGT only applies to individuals. Property investors or landlords often run their businesses through limited companies, in which case they pay Corporation Tax rather than CGT. The current rate of Corporation Tax is 19%, and companies were expecting a reduction to 17% as legislated for by the Finance Act 2016.
However, during the Government’s election campaign, Boris Johnson made a pledge to do away with the reduction and maintain the 19% rate. It will allow them to raise extra revenue in the region of £8 billion to be used to fund public services.
In addition, on 1 April 2020 the non-resident landlord regime for overseas companies will be aligned with this principle and these companies will be subject to corporation tax rather than income and capital gains tax.
Property companies may want to revisit their budgets to take into account the effect the turnaround will have on their future plans.
If you are concerned about how these changes may affect you, we would be happy to help. Contact us today, and one of our tax specialists will talk through your position and discuss your options.
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