Considering what’s been going on in the world lately, tax changes might not have been the first thing on your mind on 6 April.
But the 2020/21 tax year brought in some notable changes for landlords, which are worth knowing about if you’re working out how much income you’ll get from property this year, or if you’re planning to buy or sell.
These include changes to the relief you can claim for your residential property, as well as new requirements for capital gains tax, and support measures in response to the coronavirus crisis.
Here are some things you might have missed.
1. The end of mortgage interest relief
Since 2017, the tax relief you get on finance costs, such as mortgage interest, for your residential property has been reduced.
Where it used to be possible to deduct all of your finance costs from your rental income before tax, this relief has gradually been replaced with a basic-rate tax reduction.
As of 2020/21, you can no longer deduct any amount of your finance costs from your income. Instead everyone now receives a tax credit of 20% of the amount of interest and finance charges incurred (restricted to the amount of profit taxable).
The change to this relief, along with other recent tax changes for buy-to-let landlords, has led many to consider incorporating their rental business.
Limited companies are not affected by the reduction and can still deduct qualifying finance costs from their profits before tax.
There are various pros and cons that come with letting your property as a limited company, so be sure to talk to us before you make your decision.
2. A new deadline for capital gains tax
Until this year, if you incurred capital gains tax on the sale of a property, you could report and pay for it as part of your self-assessment tax return, due by 31st January in the following tax year. There has been a reporting requirement for non-residents since April 2015.
Since 6th April 2020, if there is Capital Gains Tax to pay, you now need to report the gain and pay the tax within 30 days of completing the sale. If you have any doubt as to whether there is any tax to pay then it is important that a calculation is carried out within the 30 days.
If you’re non-resident and you sell property in the UK, you’ll still need to tell HMRC within this 30-day deadline, even if you haven’t incurred any capital gains tax.
There are late filing penalties if the return or tax are not paid within 30 days of the completion of the sale.
3. A shorter exemption period for private residence relief
Private residence relief can reduce the amount of capital gains tax you need to pay when you sell a property.
You’ll get full relief for any years that you spent living in the home, plus a ‘final period’ at the end of the time you owned it – whether you lived there or not during that time.
The final period used to be 18 months, but on 6th April 2020, it was halved to 9 months, so you may have more capital gains tax to pay when you sell a property.
For example, let’s say you have a property that you’ve owned for 15 years, and you lived there for nine years. For the other six years, you let it out.
If you sold it in 2019/20, you would have got private residence relief on the time you lived there, plus 18 months. This adds up to 10 years and 6 months, or 70% of the total time you owned it.
The remaining 30% would be your chargeable gain, although the first £12,300 of that gain is tax-free in 2020/21.
If you sell it after 5th April 2020, however, your final-period exemption would be reduced to 9 years and 9 months, or 65% of the time you owned it, so an extra 5% of your gain is liable for capital gains tax.
As capital gains tax is charged at 28% on residential property, it’s easy to see how that extra percentage adds to your tax bill.
4. Lettings relief has been restricted
Lettings Relief used to offer capital gains tax relief if you sold a property that had been your main residence at one point and you let it out at another point in time.
For disposals after 6th April 2020, Lettings Relief is no longer available unless you lived in your home at the same time as your tenants.
Where you have lived in the property at the same time as the tenants, Lettings Relief is capped at the lowest of:
- the amount you got in private residence relief
- the same amount as the chargeable gain you made while letting out part of your home.
To determine the amount of letting relief you may be eligible for, we work out what proportion of your home you lived in and apply private residence relief on this portion of the gain. Lettings Relief can then be claimed for the part of the property your tenant lived in.
5. Coronavirus support measures
Since March, various schemes have been brought in to help individuals and businesses deal with the financial impact of the coronavirus lockdown.
Many landlords would have had their second payment on account for self-assessment tax due on 31st July 2020, but this can be deferred until 31st January 2021 if you are currently unable to pay it.
Unfortunately, landlords do not qualify for the self-employed income support scheme as rental profits are classed as investment income, not trading income.
If you run a rental company and you pay yourself a salary, you may be able to receive some support under the coronavirus job retention scheme.
What does it mean for you?
If you’re concerned about how this year’s tax changes could affect you, UK Landlord Tax is on your side.
We can talk you through the latest property tax developments, and help you plan your finances around them.
Get in touch to find out more.