Recent years have seen the UK Government introduce change after change to the way in which landlords of UK property are taxed, either on let or on sale of the property.
Following the announcement in last weeks budget, from 6th April 2020, Letting relief will only apply to the sale of property where the owner has had shared occupancy of the property alongside the tenant.
What is letting relief?
Letting relief is a capital gains tax relief available on the sale of property where the property being sold was, at one time, the owners Principal Private Residence (PPR). When sold, gains on property are deemed to have accrued evenly over the period of ownership. PPR relief, whether relating to a period of ‘actual’ or ‘deemed’ occupation, exempt the gain deemed to have arisen for the periods PPR applied. In addition to PPR relief, letting relief could provide for a maximum of £40,000 of further exemption per person. Through PPR and letting relief it was possible for individuals to reduce chargeable gains to zero, even though they may not have occupied the property, personally, for many years.
How this change will affect individuals?
Whilst the relief is being retained in UK tax legislation, the edition of this new criteria will seem for many as if it’s being abolished. It’s not yet currently clear whether the new requirement to have shared occupation will be in respect of periods after 6th April 2020 or, whether individuals selling UK property will lose any benefit of this relief overnight.
Alongside the Government’s plan to reduce the last period of deemed occupation for PPR from 18 months to 9, individuals selling UK property could see a substantial change to their taxable gain and associated liability, depending on whether their sale completes on the 5th or 6th April 2020.
If you are looking to sell your UK property and were relying on benefiting from PPR or letting relief, you should seek advice as to how this change in legislation could affect you. Harris Stewart will be able to provide you with comprehensive advice and calculations based on your figures, allowing you to make an informed decision on when to sell.
Summary of tax
A summary of the taxation of landlords;
- Profits made on the let of property are subject to tax.
- Losses made are available to be used to reduce the profit of future years, but only if claimed.
- The calculation of the profit or loss has seen changes in recent years;
- The removal of wear & tear relief – a deduction of 10% of income was given each year for property let on a furnished basis, whether or not the landlord incurred any additional expenditure in the year. This was replaced by ‘replacement of domestic items relief’ which gives the cost of replacing an item used in the let property.
- Restriction of mortgage interest – previously given as an expense when calculating the profit/loss position, interest will no longer be an expense and instead will be given as a 20% tax reducer. This legislation change will be in full force by 2020/21 but is currently being transitioned in. 2017/18 is the first year that taxpayers will feel the effect. This change was designed to impact higher and additional rate taxpayers, however, the increase in profits could see more ‘accidental’ higher rate taxpayers because of this change.
- Expenses incurred in the day to day let of the property are allowable when calculating the profit position. Thought should be given as to whether any expenses incurred are capital, and therefore would only be given as a deduction when sold.
- Personal Allowances may be available; however, these may be used by other sources of income.
- Tax rates on property income are 20%, 40% and 45%.
- On sale, any gain made must be calculated and declared to HMRC through the completion of a self-assessment tax return.
- PPR and letting relief may be available to reduce the gain made on the sale of property (see changes above).
- For non UK residents, the gain on the sale of UK property may be calculating three ways to account for the introduction of the NRCGT legislation in April 2015.
- Sales by non UK residents, on UK residential property need to be reported to HMRC within 30 days of sale. Any tax payable will also be payable by this date unless a self assessment return for the same year has already been issued.
- From 6th April 2019, non residential property will also be subject to tax when sold by a non resident.
- From 6th April 2020, all sales of UK property will be reportable within 30 days with any tax liability being payable.