New Year, New Budget, New Property Tax Rules – All the Updates for the Rental Sector
Amidst the chaos surrounding the COVID-19 crisis, there have also been significant changes quietly announced as part of the 2020 budget that will impact the rental and buy-to-let markets. If you have missed any of the news, here we recap on the biggest changes:
Property Taxes – The Headlines
- Capital Gains Tax (CGT) payable on the sale of a property is now due – on an estimated basis – within 30 days of the day of completion. This must be declared online via the governments’ new online portal.
- Letting Relief – CGT relief of up to £40,000 is claimable when selling an investment property that a landlord has previously used as their personal residence. However, under the new rules, this must have been up to the date of sale, and not at a previous period.
- Private Residence Relief – the CGT exemption for the final 18 months of property ownership, provided the landlord has previously lived in the property, has now been reduced to 9 months.
- Mortgage Interest Tax Relief – the mortgage interest payments that can be offset when filing year-end tax returns has been reduced to 20%, claimable as a tax credit.
These changes are as expected, and a continuance of the gradual changes that have been being made to rental sector tax policies over the last few years. However, as anticipated as they may be we know that with so much else dominating the news we – as property professionals – need to make sure that every client understands the changes and has the opportunity to plan accordingly.
Understanding the property tax implications, what investment strategies are available to offset these, and being fully up to date is key to continual growth throughout the property investment sector.
Ways to Manage the new Letting Sector CGT Rules
New CGT rules may seem like a headache however, there are several options available to landlords and property investors to optimise their position and make considered decisions about their future property portfolio movements to maximise CGT available.
Tax relief remains available for the rental sector, and so ensuring that all claimable allowances have been taken into account is key to driving profitability to its full potential.
The strategic management of a property investment portfolio has always been an intricate task dependent on multiple variables. Now more than ever, leveraging the value of that portfolio and planning accordingly is the smart solution.
- Keep Up To Date
Staying educated and informed about tax relief changes, and how they impact you, is the most important way to manage the impact successfully. We believe that information sharing and collaborative working is crucial to our industry, and endeavour to share news as it is released.
Knowing about the implementation date of tax reforms means being able to make decisions about the best timing of changes to a property portfolio, and being able to avoid any sudden surprises!
- Budget Accordingly
The previous rules allowed declarations of CGT liabilities to be made in the next annual tax return, which allowed a period of potentially several months before the value became payable. Under the new rules, the CGT liability against the profit made on the sale of a property must be declared, and paid, within 30-days of the completion date via the online portal.
This means being aware of the deadline, having the information ready to ensure you are compliant, and budgeting to ensure that funds released from the sale of a property are available as cash to cover the liability.
It also means a more streamlined declaration service, more control over that process, and being able to file and pay against estimates where actual figures are yet to be calculated.
Many property investors release assets to expand their portfolio in a different direction, and being conscious of the CGT payment deadline means being able to plan acquisitions within a timescale that allows the funds required to clear the CGT payable within the 30-days.
For many investors, this is simply a case of timing, and scheduling portfolio movements accordingly to avoid simultaneous sales and acquisitions.
- Claim Your Tax Credits
As the latest changes to tax relief claimable for landlords, the relief available on finance costs, including mortgage interest, has been reduced to the basic rate of 20%. It is important to understand that this relief is now provided as a reduction in the tax liability payable, rather than being shown as a deduction from the total taxable rental income.
I.e. mortgage interest is an expense that relief can be claimed on, and will be credited against the tax liability payable, rather than being a value to be offset against the total income declared.
Working out the best way to control this change depends on personal circumstances, the size of your portfolio and your existing taxation exposure. There are opportunities here to consider where the requisite declaration of a higher income figure might make preferable lending options more widely available, since the tax credit available as the new method of tax relief will be treated as a reduction in expenditure, and no longer be to the detriment of the turnover figures of the property.
Alongside the reduction in the base rate to 0.1%, this provides a unique period whereby larger investment financing will be available against increased turnover figures at potentially once-in-a-lifetime low-interest rates.
- Understand Your Claimable Expenses
Whilst the headline changes are around reductions in tax relief, and restrictions in allowances, there are positives to take away.
One important task to maintain the liquidity of a property investment portfolio is to ensure that all claimable expenses are being claimed.
Whilst the property market is temporarily paused, and in the calm before the storm that the bounceback is bound to bring, now is an excellent time to ensure that all eligible claims are being made. This will optimise your tax liability position whilst securing beneficial turnover figures which support future expansion and additional investment plans.
These claimable expenses include costs such as:
- Landlord insurance
- Estate and letting agent fees
- Legal and accountancy fees
- Council tax and utilities
- Access Financial Support When Needed
Given the impact of the Coronavirus outbreak on employment, there are several avenues of financial assistance open to landlords who have rental clients who are unable to sustain rental payments due to their employment circumstances.
Whilst rent due in arrears remains payable, and a payment plan should be agreed to ensure that the landlord receives the rent due in full, there is a 3-month mortgage payment holiday available for landlords to apply for. This scheme is intended to allow landlords to pass on a rent holiday to their tenants, without needing to try and absorb the burden of ongoing mortgage payments.
This program of support makes a pause in lending repayments available, which will ease cash flow burdens whilst rental income may be reduced.
- Consider Your Residence Arrangements
Under the new CGT relief rules, landlords can claim private residence relief for a period of 9-months, and may only claim letting relief for a property they have remained in residence at up to the point of sale.
This differs from previous rules whereby relief of up to £40,000 was claimable provided the landlord had resided in the property at any period before the sale, even if several years previously.
Should you be considering selling some of your property investment portfolio, it is worth thinking about your residence arrangements and selecting which properties to sell accordingly to be able to make the most of the CGT relief available. Understanding where your most preferential tax position lies means being able to structure any planned property sales accordingly to maximise the tax relief available.
These are challenging times for many industries, and with the COVID-19 pandemic affecting markets across the board, it is more important than ever to stay up to date with changing regulations and consider how to respond most efficiently.
Tod Anstee Ltd is one of the largest and most experienced firms of independent property consultants in Chichester and West Sussex. If you are unsure of the best course of action, please call us on 01243 523723 or complete our quick and simple online contact form to discuss your rental portfolio, property investment assets and plans for the coming year. Being able to carefully assess the marketplace, and strategise with the benefit of expert guidance will secure the value of your investments and maintain your profitable position in the property market for years to come!