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Plan now for the April 2020 property tax changes

Sucheta Thomas

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Sucheta Thomas

We are reminding those impacted by the forthcoming residential property changes that they should plan now so that they can take appropriate action to minimise any adverse tax impact.

This will mostly impact those who own second properties and those selling their properties. Here, Sucheta Thomas, our Senior Personal Tax Manager reviews the changes.

1. Mortgage interest relief disappearing

The final stage of the phased removal of mortgage interest relief will come into effect.

Previously landlords could claim the interest paid on their mortgages as a business expense to reduce their tax bill. The removal of this relief has been phased in over the past 3 tax years and from 6 April 2020 it will be completely removed.

For example

  • Before the relief was removed (before April 2017): You are a higher-rate taxpayer earning £18,000 per year rental income and your mortgage interest costs £10,000 per year. Tax is due on the profit (£8,000), so you pay £3,200 to HMRC and keep £4,800 as profit.
  • After the relief is completely removed (from April 2020): 40% tax will be due on your full rental income (£18,000) which will be £7,200. From this you can claim a 20% tax relief on the mortgage interest (20% of £10,000) which is £2,000. This means you will need to pay £5,200 to HMRC and keep £2,800 as profit. Therefore, your tax bill has increased by 62.5%.

“This reduction in relief has been phased in, so we have had a lot of warning that it was coming. However, it still puts pressure on the profitability of many rental properties/portfolios. It has the greatest impact for higher and additional rate tax payers with a high loan to value ratio against their rental properties. It is therefore worthwhile reviewing whether you should restructure, reduce your mortgage, transfer ownership or sell completely before April” , says Sucheta.

2. Paying capital gains tax sooner

There will also be changes to Capital Gains Tax (CGT) due on property from 6 April 2020.

Taxpayers will be given 30 days from the date of sale to file their return and make an advance payment towards their tax bill.

Previously the rules allow people to report and settle the CGT on the disposal of a property as part of their annual self-assessment, which can be between 10 to 22 months after the sale.

“This change will mean added compliance for those selling second properties. Having to pay the CGT due sooner may also represent a cash flow challenge for those reinvesting in other property developments” , says Sucheta.

Further proposed (but likely) changes on the way

1. Reduced tax relief on sale

A popular tax relief for those selling second homes or rental properties they have previously lived in, is principal private residence (PPR) relief. This relief exempts the gains from the sale of an individual’s main home from capital gains tax.

Under the current rules, the last 18 months of ownership of the property can qualify for the relief, irrespective of whether the property is occupied as the main residence in that period.

However, it has been proposed in the Finance Bill 2019/20 to reduce this period to the last 9 months of ownership for properties disposals on or after 6 April 2020.

For example

  • A landlord who owns a property that grew in value by £350,000 over nine years will pay £20,000 more tax if they sell after the changes.
  • A couple with a property that has gone up by £2m over 10 years will pay £76,000 more.

“This will increase the tax due for many individuals selling second properties. It will also capture others perhaps unexpectedly. For example, separating couples, people who have bought a second home before selling their first one and accidental landlords could now face unexpected tax bills” , says Sucheta.

2. Restrictions on lettings relief

Lettings relief is also set for reform, and it is proposed that from April 2020 it will be limited to people who rent out a room in their home.

Lettings relief applies where an individual sells a property that has been their main home but also been let out at some point. The relief can exempt a gain of up to £40,000 on disposal and is valuable to those who have moved into a larger family home while renting out their original property.

From 6 April 2020 however, the Finance Bill proposes that this relief will be restricted to circumstances where the property owner is sharing the occupancy with the tenant.

“Unfortunately, those who live in while renting their home is a very small fraction of those who usually claim this relief. As a result, owners who currently have the full £40,000 of relief, will find that their CGT bill on disposal could increase by £11,200 from 6 April 2020 onwards, unless they lived in the home at the time it was let out. Moving forward the relief will only really apply for those who let rooms in their property to lodgers”, says Sucheta.

Review your impact and act now

Therefore, from April 2020 there are likely to be higher tax liabilities for many taxpayers with or selling investment properties and second homes.

We are advising clients with exposure to these changes to consider their position and where feasible, to act in advance so they are not hit by increased or unexpected tax bills.

If you have any questions about how this impacts you specifically, please contact us to discuss how we can assist.

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This information has been produced by Rouse Partners LLP for general interest. No responsibility for loss occasioned to any person acting or refraining from action as a result of this information is accepted by Rouse Partners LLP. In all cases appropriate advice should be sought before making a decision.

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