Over the last 20 years, tax legislation has more than doubled in volume. While changes are spread across a broad spectrum of areas, the intricacies for those with residential properties continue to develop.
Finance costs for rental businesses
Since 6 April 2017, there has been a decline in the amount of relief private landlords renting residential property are entitled to claim. From 6 April 2020, only 20% of finance costs, including loan interest, can be claimed as a deduction from a landlord’s tax liability for a particular tax year.
This restriction has been implemented gradually over the last four years to give landlords time to react. Given the higher tax liabilities likely to arise for personally owned rental businesses, many private landlords consider it beneficial to hold their residential properties in a company, rather than in direct ownership.
For those considering transferring an existing rental property business into a company, it is imperative to understand commercial and tax implications, as benefits and drawbacks depend on individual circumstances. The principal areas of UK taxation to be reviewed when considering incorporation are generally capital gains tax (CGT) and stamp duty land tax (SDLT).
Considering selling a residential property? Important changes from 6 April 2020
Reporting
CGT is currently payable through the Self-Assessment system and payment must be made by individual taxpayers by the 31st of January following the tax year in which a disposal is made.
From 6 April 2020, the timeframe for sales of residential property is changing. Individual taxpayers will be required to report details of a property sale and make a payment to Her Majesty’s Revenue and Customs (HMRC) based on a reasonable estimate of the tax liability within 30 days of the disposal. This will only be an estimate; the exact CGT rate will not be known until taxable income for the year has been totalled at the end of the tax year.
The expedited timeframe could present challenges for disposals of property where there have been enhancements or where evidence needs to be reviewed to factor costs into calculations. To ensure the new deadline is respected, early preparation will be essential.
Principal Private Residence relief and Lettings relief
Any gain on the disposal of a property which has been used as a taxpayer’s only principal private residence (PPR) throughout its ownership is exempt from CGT. This is known as PPR relief.
If there are periods when a property is not used as the PPR, the gain is time-apportioned between periods where the property is the PPR and periods when this is not the case. There are specific rules determining whether some of the period when the property is not used as the PPR can qualify for PPR relief.
One such qualifying period is the last 18 months of ownership of the property; this applies even if the property is not occupied by the owner during this period, as long as it has been used as a PPR by them at some point. From 6 April 2020, this period of deemed occupation will be restricted to nine months; this will have an impact on the taxable proportion of the gain, and could cause an unexpected CGT liability
Additionally, current regulation states that for a period when a property is not used as the PPR but is rented, Lettings relief can be claimed which, in the most beneficial of circumstances, can exempt a further £80,000 of the gain for jointly held properties. From 6 April 2020, Lettings relief will not be available unless the owner of the property is sharing occupation of their home with the tenant.
These restrictions can have significant impact on CGT liabilities arising from properties which are generally believed to be totally exempt.
Should you wish to discuss these developments further, the C. Hoare & Co. tax team will be delighted to help.
This article has been written to provide you with useful information, but it is not personal advice. It aims to highlight certain topics which you might like to discuss with your tax advisor or investigate further. You should not rely on this article alone to make decisions and we strongly recommend you consult with a member of the C. Hoare & Co. tax team or another professional advisor if you need personal advice. This article was accurate as at 10 January 2020; and it should be noted that tax rules can change, and their application depends on your individual circumstances.
