Tax Changes You Should Know About
Capital Gains Tax on Residential Properties
Big change here! If you are a UK resident and sell a residential property in the UK, you will have to pay the capital gains tax within 30 days of disposal.
Before, if you sold a property, the capital gain was disclosed in your self-assessment under the Capital Gains section and the deadline was the 31st of January. If you used the residential property as your private residence and the full exemption applied, you did not need to include the capital gain in your tax return.
This new tax change will affect all landlords who sell residential properties that they let out, holiday homes, properties that they have inherited or properties that aren’t their main home or don’t qualify for the full residential property relief.
A new online service will be used that will allow you or your agent to make submissions and pay the Capital Gains tax due. It is important to note that agents should obtain the tax type authorisation for their client to be able to submit the submission, so it is vital to let your agent or accountant know about the sale before it is too late 😊
This change does not affect the sale of residential properties where you will get full private residence relief, sale of properties to your wife or partner, where the gain is less than your tax-free allowance (for 2020-2021 it is £12500) or if the property is sold outside the United Kingdom (this will still be included in your self-assessment).
Corporate Capital Loss Restrictions
Only 50% of the capital losses carried forward can be offset against chargeable gains from the 1st of April 2020 for companies. This change is likely to only affect larger companies and property investment companies.
Before the change you were able to carry forward capital losses to reduce the current years tax liability to £0, paying no corporation tax.
Finance Costs for landlords
The transition changes of finance cost relief for individual landlords started in April 2017 and ended on the 5th of April 2020.
From 2020-2021 onwards the tax reduction will be 20% of the lower of:
Finance costs in the tax year
Profits of the property business in the tax year
Total income (excluding investment income) that exceeds the personal allowance in the year
Any excess finance costs are carried forward to be included in next year’s tax calculation.
This is not a good thing for two reasons:
You will not get all the tax deduction for your mortgage interest payment which means you will be taxed on a higher profit and pay more tax.
Because you don’t get the tax deduction, the net profit on your property can push your taxable income into a higher tax bracket, depending on what type of income you receive which means that you might earn the same income, but pay more tax.
The above finance costs restrictions only applies for private landlords, so if you have a limited company that owns rental properties, the mortgage interest will be seen as an expense in the production of income and therefore deductible for tax purposes.
Unfortunately, mitigating this is not as simple as transferring your properties to a limited company, as there will be extra stamp duties applicable, and mortgage rates can be higher for limited companies. That is why it is important to get professional advice if you are considering making the change.
Your tax affairs will also become a little bit more complex which isn’t necessarily a problem but something that you should be made aware of, because drawing money from a limited company is different compared to doing so when the property is owned in a personal capacity.
National Insurance Charge for Employers on Termination Payments
A new NIC charge will apply from the 6th of April 2020 to the amount above the £30 000 tax free threshold for termination payments made to employees by employers. The NIC will only be payable by employers. It will also be payable during the year and not at the end of the year as is the case with fringe benefit reporting.
Private Residence Relief Changes
Currently, the period of ownership starts on the date that you acquire or buy the residential property, or on the 31st of March 1982 if that is later, and it ends when you dispose of it. The final 18 months of the period of ownership qualified for relief, never mind how the property was used in this time i.e. for business or rented it out.
From the 6th of April 2020, the 18 month ‘free’ period decreased to 9 months.