A few significant tax changes have been introduced affecting how residential property is taxed from 6 April 2020.
Mortgage interest relief
Since 2017/18, higher rate tax relief on mortgage interest has gradually been phased out. It has been replaced by a basic rate tax credit reduction from the taxpayer’s tax bill.
With effect from 6 April 2020, the transitional reduction is complete. This means no interest is now deductible from rental income and so no higher rate tax relief is available. This denies tax relief at higher rates but can also incur further tax. This is because the change may cause a person’s net income to exceed those critical points where tax allowances are lost or cut back. Such thresholds are:
- £100,000 (personal allowance),
- £50,000 (high income child benefit 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.
Date of payment of CGT on gains arising from residential property
The disposal of most residential property will be exempt from CGT because of the principal private residence exemption. However, it may be that the property was an investment or was not used solely as their main residence throughout the whole period of ownership. Where this happens, taxable capital gains can arise.
Since 6 April 2020, any CGT due on the disposal of residential property situated in the UK, by a UK resident, must be paid within 30 days of the completion date. HMRC has announced a relaxed and flexible approach to this new rule due to Covid-19. To let the new rules “bed-in”, the payment of CGT on transactions completed after 5 April but before 30 June 2020, did not need to be made until 31 July 2020. Provided the transaction was reported and the tax was paid by this date, no late filing fees would apply but interest would accrue. For sales completed on or after 1 July, the 30-day rule applies with full force.
The disposal will also need to be reported in the self-assessment return. This must be submitted, at the latest, by 31 January in the year following the tax year in which the gain arose. The precise CGT position for the tax year can then be calculated.
One way in which, in the past, it has been possible to defer the date of payment of CGT has been to invest in an Enterprise Investment Scheme (EIS). Due to the 30-day payment rule, it may now be necessary to pay the CGT and then recover it if a later EIS investment is made.
Calculation of exempt part of gain
Since 6 April 2020, the CGT reliefs available to reduce the taxable gain on properties which have been lived in have been restricted. This is because of the modification of two rules.
The first is the Lettings allowance. This enables taxable capital gains to be reduced where a property has at some stage been occupied and for other periods has been let. The highest reduction is £40,000 and is given in addition to main residence relief. Since 6 April 2020, lettings relief is only available in respect of when the property was shared by the owner and tenant. Many “accidental landlords” will therefore no longer qualify for this valuable relief.
The second is the “18-month rule”. Previously, the last 18 months of ownership of a property was treated as a period of occupation of the owner. This was the case even if the owner lived elsewhere during that time provided the owner had at some stage lived in the property. Since 6 April 2020, this ‘final period exemption’ has reduced to nine months. It remains at 36 months for those who are disabled or selling their property to move into full-time accommodation care.
Stamp Duty Land Tax Surcharge
If someone who already owns a residential property buys another, a 3% stamp duty land tax (SDLT) surcharge will apply. This is unless they are replacing their main residence. Typically, this situation will arise where a homeowner decides to purchase a buy-to-let investment or a second home.
When someone is buying a new house but cannot sell their old one at the time, thy must pay the 3% surcharge. It is recoverable if the old residence is sold within three years of the purchase of the new residence. The impact of the Covid-19 restrictions on property transactions has meant a number of people have missed the deadline. Those who find themselves in this category may take reassurance that HMRC’s updated allow applications for refunds where:
- The new property was bought on or after 1 January 2017, and
- The individual was unable to sell the previous house 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 was taken by a public authority preventing the sale.
The property must be sold, as soon as is practicable, to qualify for the relief. Currently, there is no standard SDLT on property purchases of up to £500,000 from 8 July 2020 until 31 March 2021. However, the 3% surcharge still applies to additional residential properties in appropriate cases.