10 September 2020
10 September 2020
In light of the recent increased interest in property purchase, this article serves as a reminder of some of the important recent tax changes that affect how residential property and associated finance is taxed from 6 April 2020. It also considers any implications that arise out of the COVID-19 crisis.
- Mortgage interest relief
Since 2017/18, higher rate tax relief on mortgage interest has gradually been phased out by 25% per tax year and has been replaced by a basic rate tax credit reduction in the taxpayer’s tax bill.
With effect from 6 April 2020, the transitional reduction is complete. This means that no mortgage interest is now deductible from rental income, so no higher rate tax relief is available. As well as denying tax relief at the higher rates, the change may cause a person’s net income to exceed those critical points where tax allowances are lost or cut back causing them to suffer a higher tax liability. Such thresholds are:
- £100,000 (personal allowance),
- £50,000 (high income child benefit tax 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 in an attempt to reduce net income.
How much a person may be able to pay in pension contributions will depend on that person’s circumstances. It’s important to note that there are specific rules around calculating the thresholds for the pensions annual allowance taper reduction.
- The date of payment of CGT on gains rising from the disposal of residential property
The disposal of most residential property will be exempt from CGT as a result of the principal private residence relief. However, where the property is an investment property or has not been occupied solely as a principal private residence throughout the whole period of ownership, taxable capital gains can arise.
Since 6 April 2020, a payment on account of any CGT due on the disposal of residential property situated in the UK, by a UK resident, must be made within 30 days of the completion date. HMRC announced a relaxed and flexible approach on this new rule because of the problems that have arisen as a result of COVID-19. In particular, in order 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 that the transaction was reported and the tax due was paid by this date, no late filing fees applied but interest accrued. 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 that must be submitted, at the latest, by 31 January in the tax 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 had been possible to defer the date of payment of CGT had been to use CGT deferment relief by making an investment in an Enterprise Investment Scheme (EIS). It should be noted that, as a result of the 30-day payment rule described above, in the case of the payment of CGT arising on the disposal of a residential property it may now be necessary to pay the CGT and then recover it if a later EIS investment is made and CGT deferment relief is claimed.
- Calculation of the relieved part of any gain
Since 6 April 2020, where a property that has been used as a principal private residence at some point during the ownership period is disposed of, the CGT reliefs available to reduce the taxable gain have been restricted. This is as a result of the modification of two rules:
- Lettings allowance has historically enabled taxable capital gains to be reduced by up to £40,000 where a property has, at some stage, been occupied as a principal private residence and for other periods has been let. The allowance is given in addition to principal private residence relief. From 6 April 2020, lettings relief is only available in respect of periods when the occupation of the property was shared by the owner and tenant. This means that many “accidental landlords” will therefore no longer qualify for this valuable relief.
- Previously, the last 18 months of ownership of a property was treated as a period of occupation by the owner, even if the owner lived elsewhere during that time provided the owner had, at some stage, occupied the property as a principal private residence. Since 6 April 2020, this ‘final period relief’ has reduced to nine months (although it remains at 36 months for those who are disabled or selling their property to move into full-time care accommodation).
- The Stamp Duty Land Tax surcharge
These days if a person who already owns a residential property purchases another, then a 3% stamp duty land tax (SDLT) surcharge will apply 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.
However, the SDLT surcharge can also apply when a person makes a purchase with the intention of replacing their main residence but is unable to sell it simultaneously.
In such cases, the 3% SDLT surcharge must be paid on completion but is recoverable if the old residence is sold within three years of purchase of the new residence. The problem has been that the impact of the COVID-19 restrictions on property transactions has meant that a number of people have been unable to meet the three year sale deadline through no fault of their own. Those who find themselves in this position may take reassurance from HMRC’s updated guidance on exceptional circumstances which allows applications for refunds to be made following a sale outside of the normal three-year limit where:
- The new property was bought on or after 1 January 2017, and
- The individual was unable to sell the previous property 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 taken by a public authority preventing the sale.
Once the reason for delay has ceased, the property must be sold, as soon as is practicable, to qualify for the relief.
Of course, following the Chancellor's Summer Statement, there will be no standard SDLT on property purchases of up to £500,000 from 8 July 2020 until 31 March 2021. But the 3% SDLT surcharge will still apply on additional residential properties in appropriate cases.
And on 14 July, it emerged that the Chancellor had written a letter to the Office of Tax Simplification (OTS) requesting it ‘undertake a review of CGT’. One of the points under review will be ‘the practical operation of principal private residence relief’. We may see some announcements on this in the Autumn Budget.
This document is believed to be accurate but is not intended as a basis of knowledge upon which advice can be given. Neither the author (personal or corporate), the CII group, local institute or Society, or any of the officers or employees of those organisations accept any responsibility for any loss occasioned to any person acting or refraining from action as a result of the data or opinions included in this material. Opinions expressed are those of the author or authors and not necessarily those of the CII group, local institutes, or Societies.