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New Tax Changes Affecting Property Investors and Landlords

Every new tax year signals the implementation of a number of new tax measures that have been announced by the Government in previous Budgets. This year was no different. However, there are some tax changes that came into force on 6 April 2020 for our current 2020-21 tax year that are really important for property owners, landlords and investors to be aware of. We take a look at these below.


Capital Gains Tax

One of the most important changes affecting property owners this new tax year is the one regarding the new Capital Gains Tax payment deadline.

From 6 April 2020, UK residents who sell or dispose of a UK residential property that is not their main home, for example:

  • buy-to-let properties
  • business premises
  • land
  • inherited (or gifted) property

will now have only 30 days from the completion date to inform HMRC about the sale and pay any money owed or they risk being fined. This 30-day payment window is significantly different from the previous allowable payment window that enabled property owners to delay payment until their next January tax return payment.

There are also changes for non-UK residents selling both residential or non-residential property in this country. Non-UK residents will still be required to tell HMRC within 30 days whether there is tax to pay or not but will also no longer to be able to defer payment via their self-assessment return.

Sarah Kelsey, Deputy Director, HMRC, said: “This is a significant change for customers who do have to pay the tax and who up to this point would include the gain in their self-assessment return.” 

“If customers don’t tell HMRC about any Capital Gains Tax within 30 days of completion, they may be sent a penalty as well as having to pay interest on what they owe,” she warned.

There are some exceptions to these rules, however. HMRC says that UK residents won’t have to report the sale and make a payment, if:

    • A legally binding contract for the sale was made before 6 April 2020
    • They meet the criteria for full Private Residence Relief (see below)
    • The gift was made to a spouse or civil partner
    • The gains (including any other chargeable residential property gains in the same tax year) is within their tax-free allowance (namely the Annual Exempt Amount)
    • They sold the property for a loss
    • The property is outside of the UK

You will also not have to pay Capital Gains Tax if:

    • The property is owned by a UK resident company
    • The property is owned by a non-UK resident company
    • The property is a furnished holiday let


Private Residence Relief 

Private Residence Relief is a benefit that enables property owners to sell their main residential homes without having to pay Capital Gains Tax.

Property owners qualify for Private Residence Relief if all of the following apply:

  • You have one home and you’ve lived in it as your main home for all the time you’ve owned it
  • You have not let part of it out – this does not include having a lodger
  • You have not used part of it for business only
  • The grounds, including all buildings, are less than 5,000 square metres (just over an acre) in total
  • You did not buy it just to make a profit or gain

If property owners do not meet all these criteria they may have to pay some Capital Gains Tax.

Changes to Private Residence Relief – Under the previous 2019-20 rules, property owners were exempt from paying Capital Gains Tax for the final 18 months they owned the property, irrespective of whether they were living there or not. However, the 18-month exemption period has been cut to nine months for the new 2020-21 tax year. 


Changes to Letting Relief – (when you let out part of your home) 

Another change that came into force 6 April 2020 affects lettings relief, which is a benefit that previously allowed landlords to claim tax relief on the gains they made when they sold a rented out property that, at some point, they had used as their main residence. Letting Relief can now only be claimed for the period landlords lived in their home at the same time as their tenants (not lodgers). This change will effectively disqualify the majority of buy-to-let landlords from claiming this previously popular deductible.

If property owners still qualify for the relief, they are entitled to the lowest of the following:

  • the same amount they received in Private Residence Relief
  • £40,000
  • the same amount as the chargeable gain they made while letting out part of their home

Letting Relief does not cover any proportion of the chargeable gain people make while their home is empty.


Mortgage interest tax relief

As of 6 April 2020, UK landlords can no longer offset a percentage of their mortgage interest payments against their rental income from their rental properties. This benefit has gradually been phased out since 2017. Instead, they will only be able to claim a basic rate (currently 20 per cent) tax credit against their financing costs, including mortgage interest payments, when filing their tax returns.

This reform affects the way taxable income is calculated and means a larger proportion of landlords will pay more tax.

Who is affected by the changes?

    • UK resident individuals who let residential properties in the UK or overseas
    • Non-UK resident individuals who let residential properties in the UK
    • Individuals who let such properties in partnership
    • Trustee or beneficiary of trusts liable for income tax on the property profits

Who is not affected by the changes?

    • UK resident companies
    • non-UK resident companies
    • landlords of furnished holiday lettings

Furnished holiday let landlords and companies not affected by the changes will continue to receive tax relief for interest and other finance costs in the usual way.


Entrepreneurs’ Relief – Business Asset Disposal Relief

As from April 2020 the lifetime limit for Entrepreneur’s Relief, now renamed the ‘Business Asset Disposal Relief,’ has been dramatically cut from £10 million to £1 million. The relief enables qualifying claimants to pay a lower, 10 per cent, rate of Capital Gains Tax when disposing of all or part of a business.

To qualify for the relief, both of the following must apply for at least 2 years up to the date claimants sell their business:

  • They are a sole trader or business partner
  • They’ve owned the business for at least 2 years

Landlords and property investment businesses cannot claim Business Asset Disposal Relief. However, sales of furnished holiday let businesses or commercial properties should qualify. More information about this Capital Gains Tax Relief is available here.


Regional & Allowable expenses

The main tax changes for UK property owners for the 2020-21 tax year are listed above. However, there will also be tax changes affecting landlords living in Scotland and Northern Island, which landlords with properties in those locations should also check to be sure they know their tax obligations. 

While many of these changes above will increase a property owner’s tax bill, there are still plenty of costs property owners can offset when filing their return taxes, such as letting agent fees, general maintenance costs and repairs (but not improvements) to the property, water rates, council tax, landlord insurance and more. You can find out more about allowable expenses for landlords on the Government’s website.



Coronavirus (COVID-19) help for landlords

The government has announced a series of measures to help businesses, the employed and the self-employed get through the Coronavirus pandemic. This help includes changes affecting landlords and tenants, including changes to eviction rules, deferring VAT and self-assessment payments, mortgage payment holidays more. Find out more in our article “Everything Landlords Need to Know During the Coronavirus Lockdown.

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Alex Wright, Editor