If You Are A Landlord There Are A Number Of Tax Changes Coming Which Will Affect You
From changes to Capital Gains Tax payment dates to the abolishment of mortgage interest relief, there’s plenty to take in. That’s why we’ve put it all together so you know where you stand.
The changes will take effect from April 2020 and will affect almost all sales of additional properties in the UK.
Change To Capital Gains Tax Payment Dates
Capital gains tax incurred on the sale of a property is currently paid through your self-assessment tax return. Therefore, it doesn’t need to be paid until the following tax year.
For example. A property that was sold and incurred capital gains tax in the 2018/2019 tax year doesn’t need to be declared or the tax paid until 31 January 2020.
There has been a dramatic change to this.
From April 2020, property owners will have to pay the full amount of any capital gains tax due within 30 days of the completion of the sale.
Whilst the rates of tax has stayed the same, the new time frame will have an enormous impact on the cash flow of most buy-to-let property owners. This will be felt the most by landlords and property investors selling for profit.
Failure to pay within the 30-day limit will lead to penalties and interest.
Change To Restriction Of Mortgage Interest Relief
Another change set to have a big impact is the restriction of mortgage interest relief for individual landlords.
Whilst these changes began in 2017, it is only now that they are really making an impact. From 6 April 2017, the restriction of mortgage interest and similar costs as a tax deduction began. This impacted all individual landlords who owned and let residential property. The changes were staged as follows:
- 2017/18 only 75% of finance costs were deductible
- 2018/19 the allowable costs were 50%
- 2019/20 the allowable costs are 25%
- 2020/21 no deductions will be allowable
This means that from 6 April 2020, no mortgage interest or finance costs will be allowed as a gross tax deduction.
Instead, the government has announced that an income tax reducer will be implemented against the landlord’s individual tax liability. This tax reducer is calculated using whichever is the lower from the following:
- 20% of the prescribed finance costs not already deducted from property income
- the property business profits
- total income (except income derived from investments) that exceeds the personal and blind persons’ allowance
This restriction on mortgage relief is set to push effective tax rates on property income to well over 50% by the year 2021, (for landlords who are, or become higher rate taxpayers as a result of how the restriction applies.) Many landlords are alarmed at these changes and are therefore considering selling their portfolio of property – at capital gains tax rate of up to 28%. Which will need to be paid within 30 days!
Changes to Principal Private Residence Relief from April 2020
The rule as it currently stands is
If you lived in your property before renting it to tenants, you get some Principal Private Residence Relief when you come to sell.
This means you don’t pay any Capital Gains Tax for the period of time which you lived in the property. Plus you are entitled to an extra 18 months after the date you moved out.
From April 2020 this time period reduces to 9 months.
Additionally, the £40,000 of lettings relief (which you are currently entitled to if you rent out a property that was previously your main home) will only apply to landlords who continue to live in the home and share occupancy with their tenants.
Change Means Challenges
These new rules affect ALL landlords with mortgages or outstanding finance obligations, and those selling properties. Therefore, everyone is in the same boat. However, there are still certain costs and exceptions which can be deducted from your capital gains tax (with no evidence that this will change). They are:
- Stamp duty paid on property purchase
- Buying and selling costs such as surveyor fees
- Improvement Costs
- Estate Agents Fees
- Solicitor Fees
What To Do?
Landlords are advised to plan for the impact that these changes will have on their circumstances. If you are planning to sell a property, then speaking with a professional adviser before April 2020 is strongly advised.
The legislation on property is in a state of continuous change and open to much debate. This means that gaining professional advice will help you to understand how these changes will affect you.
If your circumstances are affected by this change in regulation, get in touch with our friendly and helpful advisors at K.A.Farr & Co.