For the 20/21 tax year some changes to the tax rules were brought in which could affect you if you are:
- Claiming mortgage interest from your taxable income;
- Selling your property;
- Buying a property before 31 March 2021.
These could have a significant impact on your tax bill or on how you pay your taxes. Please feel free to get in touch if you would discuss any aspect of your letting income.
Changes to claiming tax relief on mortgage interest
In the past you were able to fully claim mortgage interest against your rental income without restriction. A few years ago, the government changed the rules to limit tax relief to 20% of your mortgage payments. The new rules were brought in gradually over a 3-year period and they are fully effective in the 20/21 tax year.
The impact of the change is not immediately obvious. Clearly this change will have a significant impact on landlords who are higher rate taxpayers. They will only be able to claim 20% of mortgage interest, when they were previously able to obtain relief at 40% or 45%. Less obviously affected are basic rate taxpayers who have built up property portfolios over the years. This is because of the way the rules operate. See the following example:
Landlord has the following income:
- Salary: £20,000
- Rental income from 10 properties: £50,000 less mortgage interest of £30,000.
Previously this landlord’s tax was calculated as follows:
Following the changes, this landlord’s tax will be calculated differently. The Mortgage interest is no longer a tax-deductible expense. Instead the landlord the receives a tax credit of 20% of the mortgage interest which is deducted from the tax bill. The impact if this change is dramatic:
In this example the landlord’s tax charge has increased by £4,000, because under the new rules part of his income is taxed at a higher rate of tax, which it wasn’t before.
Can something be done about it? Yes, with careful planning there are ways this could be addressed. Moving properties into a limited company is often proposed as a solution, but it can be expensive and will not be best solution for everyone. Please make sure you speak to us first before making any decisions.
Selling your property: Less time to pay Capital Gains Tax (CGT)
When you sell your property, you may have to pay CGT on the difference between the selling price and price at the time you acquired your property. You get a separate personal allowance (£12,300 for 20/21) and if your gain exceeds that, then you will have to pay tax. Usually there is no CGT when you sell your main home, so generally it will only affect you when you sell an investment property.
Until now, landlords have been able to declare their CGT in their next annual tax return at the same time as income tax – ie by 31 January in the year following the end of tax year. This could give landlords over a year to pay their CGT bill. Since 20/21 landlords must declare and pay CGT using the government’s new online service within 30 days of selling the property. Failure to do this could lead to fines. We can help you with the filing or it is something your solicitor may be able to arrange for. CGT can be complicated therefore we urge you to speak to us if you are planning to sell a property. The sale of the property will still have to be reported in the tax return.
Selling your property: Reduction in reliefs Capital Gains Tax (CGT)
Two main changes affect valuable reliefs only available to landlords who are selling an investment property they once lived in:
- Reduction in Private Residence Relief: Previously you were exempt from CGT for the final 18 months you owned the property, even if you didn’t live there yourself. From 20/21 this period been reduced to 9 months.
- Reduction Letting Relief: Qualifying landlords received relief from CGT of up to £40,000 when selling an investment property that was once their home. However, the new changes added restrictions that mean only a tiny proportion of landlords would still qualify for this relief.
Buying a property: Reduction in Stamp Duty (SDLT)
As part of a Coronavirus package the Chancellor announce a stamp duty holiday on the purchase of residential properties in England up to £500,000. This relief is also available to buyers of second properties although the 3% surcharge still applies. This may be useful you are planning to increase or re-organise your property portfolio. Different thresholds rules apply in Scotland and no relief is available to second homeowners in Wales.
DISCLAIMER
While we make every effort to make sure this guide is accurate and up to date, you should take professional advice before acting on the information provided here. If you contact us, we will be happy to help. Beans cannot take responsibility for actions taken and losses incurred as a result of actions taken or not taken based on the information provided here.