Recent tax changes that affect your self assessment

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Introduction

A number of big changes have been announced in recent times, which affect landlords’ tax positions.

It has been said that the Government are trying to level the playing field and penalise wealthier landlords, however, unfortunately, the changes are much more far-reaching and affect a great deal of landlords with varying degrees of income levels.

There are so many variables and new laws, that it is impossible to cover everything. However, we shall provide an overview of the key areas. There is no one-size-fits-all solution available to landlords and it is strongly advisable to seek advice on your own position, and see the best route forward for your circumstances.

From 1 April 2016, anyone purchasing additional properties besides their main home must pay an extra 3% on top of the standard stamp duty land tax (SDLT) charge. This additional surcharge still applies throughout the current temporary SDLT reduction.

The stamp duty changes affect landlords who purchase residential property, with the surcharges affecting those who own two or more residential properties and are not replacing their main residence. 

These new surcharges do not apply to mobile homes, caravans, houseboats or non-residential properties, nor do they relate to standard residential properties which are less than £40k. Purchases via a limited company will also be a target for the new stamp duty surcharges. As previously touched on, this is a basic summary, and the guidance notes on the stamp duty changes are vast. Therefore, it is strongly advisable to seek professional advice on your own scenario.

This is easily one of the most controversial announcements in recent times affecting landlords.

From April 2017, a 4 year equal phase-in commenced, and mortgage interest will no longer be deductible when calculating your rental profits when the rules are fully in force when completing your 2020/21 tax return next year. This is applicable to residential property, and so you will not be affected if you operate a Furnished Holiday Let, or a commercial lettings business. This is because this activity is classed as a “trade,” whereas the Government are attacking the so called property “investment” target.

The changes will not affect those with property in a limited company, but will affect Limited Liability Partnerships as well as unincorporated partnerships.

Therefore, we shall use a landlord named Mrs Jones as an example. She has rental income of £75,000, repairs/insurance/prof fees of £20,000 and mortgage interest of £50,000. Under the old rules her profit would be £5,000 but once the new rules are fully phased in, her profit will be £55,000. Under the new rules, the above profit will be taxed at her income tax rates.

From there, a "reducer" will be applied to the tax owed as calculated above, at the value of 20% multiplied by the mortgage interest paid.

There is a popular misconception that this only affects higher rate taxpayers. However, as well as affecting those, it can also affect those who were previously basic rate taxpayers, but who are now higher rate due to the change in determining profits.

In addition, there are far reaching consequences, in that given there is an inflated rental profit, this could impact, but not limited to:

• Child Benefit
• Child Tax Credits
• Student Loan Payments

Another point to bear in mind, is that the changes do not just affect mortgage interest, but also finance costs. This includes costs such as mortgage arrangement fees, broker fees and similar.

As previously mentioned, the Government said they were trying to assist landlords by offering a four year phase in, which commenced in April 2017.

The finance costs will be, and were, restricted as follows:

• 75% for the tax year ended 5th April 2018
• 50% for the tax year ended 5th April 2019
• 25% for the tax year ended 5th April 2020
• 0% from tax year commencing 6th April 2020.

Great care will need to be taken where losses are involved, and therefore to be clear, the tax "reducer" is calculated as the 20% of the lower of:

• Mortgage interest and finance costs not deducted from income
• Profits less any losses brought forward
• Total income (less savings and dividend income) exceeding the personal allowance

There are many strategies landlords are carrying out in an attempt to limit the damage of these changes, such as:

• starting up a limited company
• transferring property to a spouse
• making additional pension contributions
• increasing gift aid donations
• finance cost acceleration
• paying mortgages off early
• diversifying portfolio
• conversion of property to a different type

However, advice is strongly recommended, as some of these actions may result in other tax implications, and it is a case of looking at your own individual circumstances, ascertaining your future goals, and mapping the most strategic path to achieve those.

Incorporation has become a growing consideration for a number of landlords, despite its huge number of pros and cons, but they are generally attracted to the fact that the above finance cost restrictions do not apply. It has also helped that mortgage lenders have seen this growth, and more products are becoming available.

Whilst a company may be suitable for future purchases, there lies a problem in moving personally owned property into a company in potentially triggering an immediate capital gain.

This is due to the fact that a company is a separate legal entity, and therefore any such transfer would be classified as a "sale". However, the recent Ramsey case did give some landlords a glimmer of hope with regards mitigation, but again, professional advice is essential here.

There are several advantages of setting up a company. For instance:

• Companies are not affected by finance cost restriction changes
• Lower rate of tax, compared to higher rate tax under self-assessment
• Favourable rates of capital gains tax compared to 28% for some disposals of personally owned residential property at higher rate
• There can be benefits as far as passing on property to children There are also several disadvantages such as:
• Companies do not receive an annual exemption nor personal allowances
• For those owning property personally, there can be benefits when selling the property, if you have lived there. This is the complete opposite for company owned property, and there can be quite serious consequences if you reside in a company owned property
• Lower tax rates, but this is based on profits. You still need to extract this money from the company, which has tax implications, such as salary/dividends etc. Also, the dividend changes which have recently come into force may affect you
• Greater costs for accountancy fees and more compliance requirements
• Can sometimes be harder to obtain finance, although as stated earlier, this is starting to improve

There were a few important changes to Capital Gains Tax which came into force from 6 April 2020.  These changes affect residential property only.

If your capital gains are less than the annual exempt amount, and the proceeds on sale are less than four times the annual exempt amount which is £12,300 in the 2020/21 tax year then there is nothing to worry about. However, if your gains do exceed the annual exempt amount, as will often be the case of landlords, then from April 2020:

• Landlords must report the Capital Gain using HMRC’s real time service, within 30 days.
• Landlords must pay any Capital Gains Tax arising, also within 30 days.

If you complete self assessment tax returns, then you also need to report the Capital Gain on your tax return.  If there is any overpayment or underpayment of tax, then this would be resolved at that point.  So, bear in mind, that if you have overpaid tax via your 30 day return, then the refund would not be paid until shortly after you have filed your tax return with HM Revenue & Customs. If you do not fall under self assessment, then it is just the 30 day return and payment required.

It is worth mentioning that whilst the above is aimed at UK residents, non-residents will continue to be required to report and pay Capital Gains Tax (CGT) within 30 days as well.  Although, from 6th April 2020, non-residents who complete self assessment tax returns will no longer get the option to defer the payment to the normal payment due date for their tax return.

There are oddities within the new CGT rules; confusingly, whilst the tax point for CGT is the date of exchange, the 30 day rule with regards the real-time return and payment, is actually from the completion date. 

HM Revenue & Customs refer to the tax paid within 30 days as “notional,” and somewhat akin to a payment on account, if these apply to you on your tax returns.  Of course, you will have to report each gain, so if you sell a property in May 2020, and August 2020, with each attracting a capital gain, then a separate return and payment will be required for each, again, within 30 days of the completion date.  As such, you will likely need to consider previous returns when calculating CGT bills within the same tax year.  Worth pointing out too, that you may of course offset any available capital losses against your capital gains.  These “notional,” or interim tax payments, will then be somewhat finalised when you complete your self assessment tax return.

There are two further big Capital Gains Tax changes which came into force on 6 April 2020. 

Final Period Exemption – Prior to 6 April 2020, those entitled to this relief could treat the last 18 months of ownership as being exempt from Capital Gains Tax.   However, from 6 April 2020, that reduced to 9 months.  This is of course not good news, especially considering it used to be 36 months not all that long ago.  It is worth pointing out that the 36 month rule can still apply in certain circumstances, such as for those in a care home.  There are also added complexities regarding PPR history between spouses.  It is best to seek professional property tax advice in this area.

Lettings Relief – Prior to 6 April 2020, landlords who sold a rented property, which was once their main residence, could be entitled to lettings relief, worth up to £40,000 per owner.  However, from 6 April 2020 this is all but abolished.  We say all but abolished because there may be a very small number of landlords who could still benefit, such as in the unlikely event you let the property whilst also living in it at the exact same time.  Other than that, the relief has disappeared. 

Finally

We hope this guide has been helpful, but to emphasise again, the above is very much scratching the surface, as there is simply too much to cover.

If you require any individual tailored advice, and for any of your property tax needs, please do not hesitate to contact RITA4Rent on

Freephone: 0800 1 22 33 57

Email: [email protected]

Website: www.rita4rent.co.uk