Tax advice for landlords

The tax rules affecting UK residential property have undergone substantial changes in the last few years. This is continuing, and some of the changes are highlighted below.

Buyers beware!

As a buyer of commercial and residential property, you should be aware that the time limit to file a Stamp Duty Land Tax (SDLT) return and pay the tax due has reduced from 30 days to 14 days, from 1 March 2019.

Sellers beware!

If you sell a buy-to-Iet property after 6 April 2020, you may need to deliver a return to HMRC and pay any capital gains tax due within 30 days of completion.

A return won’t be required where there is no capital gains tax due. (This could be because private residence relief (PRR) applies in full or the property was sold at a loss.)

If you do need to submit a return, then this is an extra reporting requirement and the payment that’s made within 30 days will be held as a payment on account until you complete your year-end tax return.

When you complete your normal tax return a balancing payment or repayment may be needed.

Late filing penalties

If you don’t file your return within 30 days, then HMRC will charge penalties. Although the penalty regime hasn’t been confirmed yet, it‘s expected to be in line with other late filing of returns:

  • An initial penalty of £100 in all cases.
  • A further penalty of 5% of the tax due, or £300 if greater, for returns over six months late.
  • A further penalty of 5% of the tax due, or £300 if greater, for returns over 12 months late.

HMRC also have discretion to charge penalties of £10 per day for returns that are filed between three and six months late.

Interest will also be charged at a rate of 3% on any underpayment of the liability.

Residence relief and letting relief

The sale of your main home will probably be covered by a relief known as private residence relief (PRR) and, as long as you’ve lived in the property for the entire time that you’ve owned it, then any gain made should be tax free. But what happens when you’ve lived in a property as your main residence but you then move out and let it?

Under current rules, you can claim PRR for the period of occupation and a secondary relief, known as letting relief, can be claimed for the period when the property was let.

Letting relief provides a further exemption of up to £40,000 per person. However, from April 2020, HMRC are proposing two changes:

1. Letting relief will only apply where the owner is in shared occupancy of the home with the tenant.

2. HMRC currently allow taxpayers a complimentary 18 months of PRR in respect of the final period of ownership. This is being reduced to just nine months.

Case study

Mrs Smith has owned a property for ten years. She lived in the property for the first four years but moved in with a partner at the end of the fourth year. Now she’s decided to sell and is expecting to make a gain of £100,000.

Currently, she gets PRR for four years of ownership plus a complimentary 18 month period that HMRC allow in respect of the final period of ownership (five and a half years of the ten year ownership period), resulting in 55% of gains being exempt from capital gains tax (CGT). Therefore, Mrs Smith won’t pay tax on £55,000 of the gain. The remaining £45,000 gain isn’t covered by PRR and this represents the chargeable gain.

At this point, under current rules, letting relief applies to the remainder and will reduce the chargeable gain down to £5,000. The result of this is a tax bill of £1,400 (assuming gains are taxed at 28% and she’s used her capital gains annual exemption elsewhere). If the sale takes place on 31 March 2020 then this tax will be payable on 31 January 2021.

If the sale takes place on 10 April 2020 then the new rules will apply. Making the same assumptions, this means Mrs Smith will now incur a CGT bill of £14,700 on sale — this will be reportable and payable by 10 May 2020.

If you have any queries or would like more information, you can contact me on 01473 833411 or [email protected]

This article is designed for the information of readers. Whilst every effort is made to ensure accuracy, information contained in this article may not be comprehensive and recipients should not act upon it without seeking professional advice. “MHA Larking Gowen” is the trading name of Larking Gowen LLP, which is a limited liability partnership registered in England and Wales (LLP number OC419486). Where we use the word partner it refers to a member of Larking Gowen LLP. © MHA Larking Gowen