The tax landscape for buy-to-let property investors has changed significantly in recent years, and unfortunately not for the better.
Whilst we have been spared any significant changes for the 2021/22 tax year the impact of previous changes will start to be felt for many as they prepare their 2020/21 Tax Return or look to sell their buy-to-let properties.
Mortgage interest relief
A few years ago, you could deduct all of your mortgage interest from your rental income to reduce your rental profits and taxable income.
This began to change from April 2017 and the 2020/21 tax year is the first year that no mortgage interest can be deducted. Instead, once the tax on your income has been calculated you can claim a tax credit of up to 20% of your mortgage interest.
The impact of this is that your taxable income for the year will be higher. If you are pushed into the higher rate tax-band as a result you will be paying some of your tax at 40% instead of 20%.
You may also find that your child benefit claim is affected. The £50,000 income threshold for the High-Income Child Benefit Charge is based on your taxable income, and this will be higher now that you can no longer deducted mortgage interest first.
For basic rate taxpayers whose rental income continues to fit neatly into the basic rate band despite no longer being able to deduct interest this will make no difference, but for those who are higher rate taxpayers or who are pushed into higher rate as a result of this change, their tax bill will be higher.
The end of lettings relief
When you sell your buy-to-let property you will need to consider whether you have realised a capital gain and whether there is any capital gains tax payable.
At its simplest, the capital gain is basically the increase in the value of your property between your purchase and disposal. (We used to have indexation allowance, and then taper relief which gave some relief for inflationary increases, but these disappeared long ago.)
You can deduct the costs of any improvements to the property and if you ever lived in the property as your main residence you can claim a relief from that proportion of the gain that related to the time you lived there (private residence relief).
We also used to have a lettings relief. This gave you relief from up to £40,000 of capital gains on properties that you let out and which you had also lived in at some point in your ownership.
This valuable relief was withdrawn for disposals on or after 6 April 2020. There is no transition period, no banking of lettings relief accrued before that date, simply a cliff edge.
Reduction in private residence relief
Landlords who used to live in the property that they now rent out used to be able to claim private residence relief against the proportion of gains relating to the last three years of their ownership even if they didn’t actually live in the property during that time.
From 6 April 2014 this three years was reduced to 18 months and now for disposals from 6 April 2020 this has been further reduced to just 9 months.
Capital gains tax is payable sooner
If you had sold a buy-to-let property during the 2019/20 tax year, any gain would have been declared to HMRC on your self-assessment tax return, with the return and any tax payable being due on 31 January 2021. The tax would therefore be payable between 10 and 22 months after the sale.
If you sell a residential property on or after 6 April 2020 then you have to report the gain to HMRC within 30 days of disposal using a newly introduced capital gains tax return. You will also have to pay the tax due within 30 days of disposal which is a huge acceleration in the payment deadline.
In many cases the tax payable will initially be an estimate as the rate of capital gains tax payable depends on your taxable income which will not be known until the end of the tax year. It’s likely that you will still have to report the gain on a self-assessment tax return to confirm the tax payable.
If you would like to know more about reporting the gain to HMRC please see our blog Disposals of UK Residential Property: The 30-day Return.
If you have any questions or concerns relating to any aspect of property accounts or taxation please get in touch. I’m happy to help and initial consultations are free of charge.
