Property tax: an update on Income Tax, CGT, Stamp Duty and ATED

May 30, 2019

Income Tax 

• This tax year 19-20, we are now in the 3rd phase of the interest relief restriction.  This means that only 25% of mortgage interest for buy-to-let properties can be offset directly against property profits and the remaining 75% of mortgage interest payments are shown separately on the tax return attracting only basic rate tax relief (20%)
• The property allowance is a fixed £1,000 tax exemption that can be applied against property profits instead of deducting allowable expenses
• If gross rental income is below £1,000 there is no need to report this at all; if between £1,000 and £2,500 then the tax payer should contact HMRC.  If gross income is above £2,500 from a property, then the tax payer needs to register for self-assessment
• The default position for preparing property accounts for income tax purposes is the cash basis  -this means income and expenditure is shown when paid for.  The cash basis of accounting limits the use of capital allowances, however these are restrictive for residential property but can be more significant for holiday furnished lets.  If it is more tax efficient to use the accruals basis of accounting, the tax payer must tick to select this when preparing an income tax return

Capital Gains Tax

• Principal private property relief (PPR)  which is a very generous relief – up to 100% of any gain can be tax free if the property is lived in by the tax payer during the entire period of ownership – will now be restricted to 9 months from April 2020.
• Extending PPR to the final period of ownership enables taxpayers to sell a former home with the full benefit of the relief, even if they have already moved into a new residence when the sale takes place. This is on the proviso that the former home has been occupied as a main residence at some time in the period of ownership
• There is an exception for the disabled or those moving into a long-term care home where the final period exemption will continue to be 36 months
• There are extensions to PPR that apply, for example if the owner moves into job-related accommodation or temporarily works abroad and lets the property for that period
• Lettings relief was introduced nearly 40 years ago and was designed ‘to ensure people could let out spare rooms within their property on a casual basis without losing the benefit of PPR’. From 6 April 2020, lettings relief will be available only where the owner continues in occupation alongside one or more lodgers and will not apply where the whole house is let.  The impact on loss of lettings relief could mean an increase in the taxable gain of £40,000 (the maximum lettings relief available)
• There are also two extra statutory concessions to help tax payers:
  • ESC D49 allows a delay of up to 12 months to move into the property for the purposes of PPR for example to allow refurbishment to take place.  A longer period of up to 24 months may be allowed in exceptional circumstances
  • ESC D21 allows those acquiring a second residence to make a late claim as to which residence should be considered their main residence where they were unaware a claim could be main, for example moving into rented or job related accomodation

Spouses

• From 6 April 2020, HMRC proposes that if a property is transferred between spouses, the transferee should always inherit the transferor’s period of ownership and the use to which the property was put during that time.
• This means that the full ownership period is taken into account when working out if PPR is available, including if the property was let for a period of time
• The default position for spouses owning property jointly is 50:50 ownership whereas a different ownership split may make more sense for tax planning purposes. It is worth considering completing Form 17 to allocate capital share in the property differently. There must however be a foundation for this. An example would be where a wife puts more capital into a property and is therefore given a larger ownership share. If she is a basic rate tax payer and her spouse is a higher earner, it would be tax efficient for her to own a larger share of the property than her spouse

Stamp Duty

• From 25 January 2019 there was an increase in the Additional Dwelling Supplement (ADS) to 4%
• The supplement is applied to the purchase of second and additional properties over £40,000 and will be applied to the whole of the purchase price
• This needs to be paid within 30 days of taking possession of the property otherwise penalties are incurred
• A solicitor will arrange payment of this supplement as part of the overall payment of Land and Buildings Transaction Tax (LBTT)
• Companies, partnerships and individuals are all subject to the ADS

Annual Tax on Enveloped Dwellings (ATED)

• All companies (UK and overseas) holding a UK residential property valued at over £500k are subject to ATED
• Annual charges start at £3,650 for a property valued at £500k and rise in line with inflation
• The annual charge is based on the updated 1 April 2017 valuation
• Property that is subject to the ATED regime must pay corporation tax on gains from April 2019