The start of the new tax year brings changes to mortgage interest tax relief and capital gains tax for buy-to-let landlords.
Buying a property and then renting it out has always been popular with those who look to achieve a steady return on their savings, many may even rely on rental income to boost their pension.
But from 6th April onwards, many landlords could find it harder to make a profit, as a result of tax changes the Government says have been brought in to “make the tax system fairer” within the lettings sector.
Mortgage Interest tax relief
The Government has been in the process of narrowing down mortgage interest tax relief since 2017 and steadily replacing it with a brand-new system.
Before April 2017, landlords were able to claim mortgage interest tax relief on 100% of their mortgage interest costs – however, the amount they could claim was gradually reduced to 25% last year.
But under the new system, which came into force on 6 April 2020, the relief has been completely phased out and replaced with a 20% tax credit for mortgage interest.
Changes to mortgage interest tax relief will affect around 55% of landlords who have one or more buy-to-let mortgages.
However, industry bodies have said the changes have caused some landlords to stop expanding their portfolios or even sell some of their properties.
Capital gains tax
Capital gains tax (CGT) is charged on the increase in an investment property’s value when the owner comes to sell it. Each owner can make a profit of £12,000 before capital gains tax will apply, and costs such as solicitors’ fees and stamp duty can be deducted from the total profit. If capital gains tax is applied, the rate is 18 per cent or 28 per cent depending on annual income.
But, from the 6th April, there are some changes being made to how capital gains tax works -because now, landlords will have to pay CGT quicker.
Currently, CGT is paid when a landlord files a tax return in the following tax year. But landlords will now have to pay their tax bill within 30 days of the sale being completed. Meaning a (potentially) huge difference in the amount of time you have to make a payment, when compared to the old regulations.
Private Residence Relief
Private Residence Relief (PRR) provides a useful exemption from Capital Gains Tax (CGT). As it stood, landlords could claim PPR for the duration of time they spent living in their property before letting it to tenants, plus an extra 18 months after moving out.
Now, this will be reduced to the time they lived in their property, plus nine months, meaning landlords will lose nine months’ worth of CGT relief when they come to sell. Please note that this period is extended to 36 months for persons who are disabled or resident in a care home and these special rules will continue to apply.
CGT relief of up to £40,000 or up to £80,000 for a couple was available for those who let out a property that is, or has been, their home. However, as of April 2020, this relief will only apply to landlords who are in shared occupancy with their tenant, as the Government aims to ‘better focus PRR to owner-occupiers’.
Temporary relaxation of the new CGT filing deadline
HMRC has announced a temporary relaxation of the new filing deadline. This will apply to transactions completed between 6th April and 30th June 2020. HMRC will not issue late filing penalties as long as the CGT payment on account returns are filed by 31st July 2020. Transactions completed from 1st July 2020 onwards will receive a late filing penalty if they are not reported within 30 calendar days of completion.
If you have never lived in your rental property, the changes will not impact you.
Transfer between spouses
The new rules being introduced from 6th April 2020 will ensure that full PPR relief won’t be available where the property previously let out was not used as a main residence, but will also ensure that where a property was previously used as a principle private residence, but wasn’t used as such at the time of the transfer, the gain will now qualify for PPR relief.
At Belvoir, we like to keep our landlords up to date with all the most current rules and regulations brought in by the Government. If you’d like to talk to us about any of the above topics then please get in touch.
