Capital Gains Tax for UK property sales from 6 April 2020

Principal Private Residence Relief Changes

From 6 April 2020 tax relief will only be provided for the final 9 months of ownership therefore halving the relief (for the year to 5 April 2020 the final period relief was 18 months).

Filing returns and payment deadline

From 6 April 2020, if you’re a UK resident and sell a residential property in the UK you’ll have 30 days to tell HMRC and pay any Capital Gains Tax owed.

If you don’t tell HMRC about any Capital Gains Tax within 30 days of completion, you may be sent a penalty as well as having to pay interest on what you owe – so it’s really important that everyone involved in the sale of a residential property fully understands these changes, which affect both UK and non-UK residents.

You won’t have to make a report and make a payment within 30 days when:

• a legally binding contract for the sale was made before 6 April 2020
• you meet the criteria for full Private Residence Relief
• the sale or disposal was made to a spouse or civil partner
• the gains (including any other chargeable residential property gains in the same tax year) are within your tax free allowance (called the Annual Exempt Amount)
• you sold the property for a loss
• the property is outside the UK

If you need to file a report with details of capital gains from 6 April 2020, the following information is needed;

• property address and postcode
• date you got the property
• date you exchanged contracts when you were selling or disposing of the property
• date you stopped being the property’s owner (completion date)
• value of the property when you got it
• value of the property when you sold or disposed of it
• costs of buying, selling or making improvements to the property
• details of any tax reliefs, allowances or exemptions you’re entitled to claim
• property type, if you’re a non-resident

 

 

 

 

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Builders – VAT: reverse charge for building and construction services

Changes to the way that builders charge VAT for their services are being introduced from 1 October 2019. The guidance issued by HMRC does not give detailed examples and we expect further details and examples to be released in Spring 2019.

The change in rules from 1 October 2019 will affect VAT registered builders providing certain construction or building services to another VAT registered business for onward sale/supply. There are some exceptions where the new rules won’t apply, typically it will apply to work that falls within the construction industry scheme.

The Reverse Charge Mechanism 

Under the current rules where both businesses are VAT registered and where the building work is normally standard rated for VAT, a subcontractor charges VAT on the supply of building work to contractors, the contractor would pay the VAT to the subcontractor and the subcontractor would pay this VAT to HMRC.

Under the new rules that apply from 1 October 2019, this will now be treated under the Reverse Charge rules. The invoice to the contractor will need to state that the service is subject to the domestic reverse charge. 

The contractor will need to treat any VAT under the reverse charge rules as both input and output VAT. The result for the contractor is a nil net tax position, as they are including the VAT as both input and output VAT.

For the subcontractor, this may lead to VAT returns being submitted where repayments of VAT are due to them from HMRC, as no VAT will be charged under the reverse charge rules. This could potentially lead to delays for some businesses in receiving VAT refunds from HMRC.

The contractor needs to know whether they are dealing with the final customer, as the reverse charge only applies between businesses. VAT should be charged to the end customer.

 

 

 

 

 

Rent a Room Relief – Proposed Changes

HMRC have been looking at the rules around rent a room relief and whether the rules around the relief should be changed. 

What is Rent a Room Relief? 

Rent-a-room relief provides that the rent received by an individual from a lodger from their main residence can be exempt from income tax (currently up to £7,500).

Why are HMRC considering changing the rules? 

HMRC are concerned that the idea behind the rent a room relief, to increase the amount of rooms available to rent, is not being used as was initially intended. The relief was introduced in 1992 but over recent years online apps and social media have made it easier for landlords to let out rooms for short periods.

Policy Paper

In a policy paper released 6 July, HMRC proposed a change to the legislation in the form of an additional test that must be satisfied in order for income to be eligible for rent-a-room relief. The test requires the individual or individuals in receipt of rental income to have “shared occupancy” of the residence in question for all, or part, of the period of occupation which gives rise to the receipts.

Who will the changes affect?

The proposed change will affect rentals where the owner does not intend to actually be present in the property at the same time as the lodger. So for instance where there was a major event taking place near the property – for instance a festival or similar event – the owner might let out the house for say two weeks and go on holiday for that complete period. The receipts from the rental would not be eligible for rent-a-room relief as there is no shared occupancy during the period of the rental. The receipts would however be eligible for the property allowance

Where there is an element of shared occupancy, HMRC give the following examples in the policy paper:

• An individual rents a room in their main residence to a student during term time. The landlord goes on holiday for a week during the rental period. The receipts would be eligible for rent-a-room relief as there is shared occupancy for part of the period of the rental. The receipts would be eligible for property allowance if rent-a-room relief was not claimed.
• An individual lets their house (their main residence) during the Wimbledon tournament to a visiting family. The individual goes on holiday for the whole period of the rental. The receipts from the rental would not be eligible for rent a room relief as there is no shared occupancy during the period of the rental. The receipts would be eligible for property allowance.

 

When will the changes come in?

Should the changes gain Royal Assent to Finance Bill 2018-19, the changes will come in from April 2019.

We can advise on whether the rent a room relief is available and circumstances where it will not be available once the changes take effect.

 

Trading and Property Allowances

From 6 April 2017, there was a new £1,000 Trading Allowance and £1,000 Property Allowance available to use against trading income and rental income. Although the allowance is designed to be straightforward, as ever, there is always some detail in the rules that is worth considering.

Trading Allowance

The trading allowance can be used against self employment income from 6 April 2017. Here some important points to consider with the allowance;

• If your total self employment income before expenses in the year is £1,000 or less, you may not be required to submit a tax return.
• You will have the option of claiming the trading allowance or claiming expenses in the year. It may be more beneficial to claim expenses where allowable expenditure is more than £1,000.
• The trading allowance cannot be used to create a loss, whereas if you claim expenses in the year, this can create a loss, from which it might be possible to get tax relief.

Property Allowance

The property allowance works in a similar way to the trading allowance. It can be used against rental income when renting out a property that is not your own home/residence.

You cannot use either allowance against;

You can’t use the allowances in a tax year if you have any trade or property income from:

• a company you or someone connected to you owns or controls
• a partnership where you or someone connected to you are partners
• your employer or the employer of your spouse or civil partner

You can’t use the property allowance if you:

• claim the tax reducer for non-deductible costs of a dwelling loan
• deduct expenses from income from letting a room in your own home instead of using the Rent a Room Scheme

 

SA302 Forms & Applying For a Mortgage

If you want to apply for a mortgage and you have income in the form of dividends, or you are self-employed, for many years mortgage lenders have requested copies of SA302 forms. These forms were provided by HMRC showing a breakdown of income and the tax paid in each tax year.

HMRC has stopped providing these forms from 5 September 2017. HMRC has said for some time that many mortgage providers should be accepting tax overviews* but we have often continued to request SA302 forms, as we know that some mortgage lenders will not accept tax overviews.

*A tax overview is taken directly from the HMRC website and shows the tax liability in each tax year and the payments towards each liability. 

Now HMRC have stopped providing the SA302 forms, they have published a list of lenders who will accept a tax overview here. We can provide this tax overview breakdown to clients if you are applying for a mortgage.

Landlord Tax Update

There have been a number of changes recently to tax for the purchase of a second residential property and expense claims against rental income for landlords. There are a number of considerations to be made when looking at these changes.

What Has Changed? 

Stamp Duty changes mean that if you purchase a second residential property, that is not your main residence, you will pay an additional rate of 3% on top of the normal rates of stamp duty. You may be eligible for a refund of the additional rate of Stamp Duty paid, if you sell your previous main residence within 36 months.

Another consideration is with regards to a change to expense claims against rental income. A group of landlords lost their court case in October 2016, which means that from April 2017, there will be new rules on how mortgage interest relief is calculated. This will apply to individuals that receive rental income from properties of which a mortgage or form of finance has been taken out to purchase the property.

Using a Company

There are a number of articles online that suggest that transferring property to a company can help to save tax, if the mortgage interest relief changes will lead to a higher personal tax liability. A company is currently still entitled to claim all mortgage interest costs against rental income, but we would always recommend speaking to us before deciding to transfer a property, as there can be a number of potential tax implications to consider.

When you transfer a property from personal ownership or beneficial ownership (through a deed of trust) to a related company, it will trigger a capital gain or loss. The gain or loss is calculated at the market value of the property at the time it is transferred to the company, less the cost of purchase and any enhancement expenditure on the property. This should be considered before you decide to do this. Any gain in the value of the property up to the date it is transferred is still tied up in the property, which could lead to a potential tax liability on transfer before any gains on the final sale have been realised. 

One other consideration is stamp duty, which may be due if the property is transferred to a company that is controlled by the same individuals that owned the property before the transfer took place.

It may still be beneficial to use a company, but it is always best to seek advice before making any decisions. There are some reliefs that could potentially be available.

We can advise on the best solutions with property investments and whether it will be beneficial to purchase property with a company, or transfer property to a company.

Please feel free to contact us for a free initial consultation.

 

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Court case update – mortgage interest relief

A group of landlords have lost their High Court attempt to force a judicial review of legislation to reduce tax relief on buy-to-let interest payments starting in April 2017. The groups hearing took place yesterday at the royal court of justice, London.

The group named the new measure on restricting mortgage interest relief the “tenant tax” and claim that tenants will see rent increases as a result.

The group argued that as the legislation applies to individuals and not corporate landlords, it is unlawful as it could result in a grant of state aid to corporate landlords.

This loss signals the end of the legal route but the group intend to continue their campaign to put pressure on MPs to amend tax policy.

Property expenses changes in 16/17 tax year

Changes to the way in which landlords deduct costs for replacing furniture and fittings in rented properties from 6 April 16:

 

Who is likely to be affected

Companies, individuals and others, such as trusts or collective investment schemes that let residential properties.

General description of the measure

The Wear and Tear Allowance for fully furnished properties will be replaced with a relief that enables all landlords of residential dwelling houses to deduct the costs they actually incur on replacing furnishings, appliances and kitchenware in the property.

The relief given will be for the cost of a like-for-like, or nearest modern equivalent, replacement asset, plus any costs incurred in disposing of, or less any proceeds received for, the asset being replaced.

Detailed proposal

Operative date

The measure will have effect for expenditure incurred on or after 1 April 2016 for corporation tax payers and 6 April 2016 for Income Tax payers.

Current law

Current law providing for the Wear and Tear allowance is contained in sections 308A, 308B and 308C of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005) for Income Tax and at sections 248A, 248B and 248C of the Corporation Tax Act 2009 (CTA 2009 for Corporation Tax).

Proposed revisions

Legislation will be introduced in Finance Bill 2016 to repeal the Wear and Tear Allowance provisions and make new provision for a deduction for the replacement of furnishings.

The deduction will be available in calculating the profits of a property business which includes a dwelling-house. The deduction is available for capital expenditure on furniture, furnishings, appliances (including white goods) and kitchenware, where the expenditure is on a replacement item provided for use in the dwelling.

The amount of the deduction is:

• the cost of the new replacement item, limited to the cost of an equivalent item if it represents an improvement on the old item (beyond the reasonable modern equivalent) plus
• the incidental costs of disposing of the old item or acquiring the replacement less
• any amounts received on disposal of the old item

This deduction will not be available for furnished holiday lettings because capital allowances will continue to be available for them.

 

Considerations – previously payments towards white goods, such as fridges and freezers for rented properties did not gain any tax relief; the only allowance available was the wear and tear allowance. We believe this is a good change, as it encourages landlords to replace items in rented properties and also gives the fair amount of tax relief for this expenditure.

One area of caution is that the new relief from 6 April 16 is available on replacement of items, not on new items purchased.

 

Please feel free to ask us any questions you have about the changes.

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