Tax on residential property investment – a tax on all your houses

Residential property investors are experiencing a time of unprecedented change to the tax treatment of residential properties. The property tax system is becoming increasingly pervasive as both the Scottish and the UK Governments seek to increase tax revenue, slow down the property market and encourage wider property ownership. It should come as no surprise, however, that the impact of these measures will, in practice, extend well beyond their intended targets.

There are a wide range of residential property related tax measures that came into force in recent tax years that may catch-out the unwary. These include:

• Restrictions for higher rate taxpayers for interest relief on the financing of residential property investments (please see 9. below)
• Restrictions to certain aspects of the capital gains tax (CGT) principal private residence relief exemption (please see 14. below)
• An introduction of a 30 day window for the reporting and payment of CGT on the disposal of ‘second’ residential properties (please see 15. below)
• Freezing of the level of the residence inheritance tax (IHT) nil rate band at £175,000 for deaths taking place in the period from 6 April 2020 to 5 April 2026

This article highlights some of the main changes to the tax system on the acquisition, ownership and disposal of residential properties.

Acquisition

1. Supplementary Land and Buildings Transaction Tax (LBTT)/Stamp Duty Land Tax (SDLT) charge (introduced 1 April 2016)

A supplementary LBTT/SDLT additional dwelling supplement (ADS) charge applies on the acquisition of ‘additional residential properties’ on transactions with a value over £40,000 taking place on or after 1 April 2016.

The LBTT ADS charge was increased from 3% to 4% from 25 January 2019. The SDLT ADS charge remains at 3%. A new SDLT surcharge of 2% on non-UK residents purchasing residential property in England and Northern Ireland came into force on 1 April 2021. This is in addition to any SDLT ADS charge.

The purchase of, say, buy-to-let properties, holiday homes or student accommodation for children are all potentially caught by the supplementary charge. The supplementary charge could, however, also apply in other less obvious cases, including where you already hold or are treated as acquiring an interest in residential property as a result of, for example, being left a legacy under a will, being a beneficiary of a trust or a partner of a partnership that holds residential property.

The supplementary charge is levied in addition to the normal rates of LBTT/SDLT applied to the purchase price. There would, for example, be an additional £8,000 LBTT charge on the purchase of a buy-to-let property for £200,000 where you already own your family home.

See further information in our Furnished holiday lets – time for a tax break article.

2. Reduction in SDLT threshold on purchases by a company (1 April 2016)

A 15% SDLT charge potentially applies to companies (and certain other corporate vehicles) purchasing residential property situated in England and Northern Ireland with a value in excess of £500,000. This SDLT charge was introduced by the UK Government with effect from 1 April 2013 as one of three new tax charges designed to discourage individuals from holding high value residential property for their own personal use through companies (please see 8. below). It applies to both UK and offshore corporate vehicles.

This tax regime originally only applied to residential properties with a value in excess of £2 million. The current lower threshold of £500,000 has resulted in a far greater number of companies being subject to this tax regime. There are tax reliefs available for genuine commercial businesses acquiring residential property, including, for example, property letting, trading in or redeveloping property and for certain types of employee accommodation. Supplementary LBTT/SDLT charge (introduced 1 April 2016)

3. Lifetime ISA for first time buyers (6 April 2017)

A Lifetime ISA is available from 6 April 2017 for the under 40s to assist them with the purchase of their first home or to help save for retirement. It is possible for individuals to pay up to £4,000 every tax year into the Lifetime ISA. The Government will pay a pound bonus into the ISA at the end of each tax year for every four pounds invested (i.e. a 25% bonus) prior to the individual reaching their 50th birthday.

The Lifetime ISA can be used as a deposit by a first time buyer for a home up to the value of £450,000. Two or more individuals will be able to use their respective lifetime allowances when purchasing a home together.

4. LBTT/SDLT relief for first time buyers (22 November 2017 and 30 June 2018)

LBTT (30 June 2018)

First-time buyers purchasing a property situated in Scotland worth up to £175,000 will pay no LBTT, while those with a purchase above this value will benefit from relief on the portion of the price below this threshold. This relief will has a maximum benefit of £600.

SDLT (22 November 2017)

First time buyers in England and Northern Ireland now benefit from the following reliefs on residential property transactions:

• Purchase price up to £300,000 – No SDLT
• Purchase price between £300,000 – £500,000 – SDLT at a rate of 5% on excess over £300,000
• Over £500,000 – Normal rates of SDLT

The relief for first-time buyers was extended to all shared ownership properties with effect from 29 October 2018.

Ownership

5. Scottish income tax (6 April 2018)

Scottish income tax (SIT) applies to individual Scottish taxpayers with rent and other income arising from their property interests.

See further information in our Scottish income tax article.

6. Income tax wear and tear allowance (6 April 2016)

Landlords can only claim income tax relief on the actual costs of renewing furniture, furnishings, appliances and kitchenware in furnished rental properties. It was previously the case that landlords were able to claim a notional 10% wear and tear allowance based upon the gross rental income irrespective of whether any costs had actually be incurred.

7. Income tax rent-a-room relief (6 April 2016)

Rent-a-room relief is an income tax exemption available to individuals who let-out furnished rooms in their own homes. The furnished room(s) must be used by the tenant as their living accommodation and are available to both owners and tenants who sub-let.

The rent-a-room relief exemption increased from £4,250 to £7,500 with effect from 6 April 2016. The exemption is applied to the gross rent received.

8. Increase in annual charge for companies owning residential property (1 April 2018)

An ATED charge was introduced by the UK Government from 1 April 2013 as part of its package of tax measures targeting companies holding interests in high value residential property situated in the UK (please see 2. above). The Government’s net has gradually widened with the value of residential property now being potentially caught by ATED reducing from £2 million to just £500,000.

The level of the potential ATED charge will depend upon the market value of the residential property held in the company as at 1 April 2017. Companies holding a residential property with a market value of between, say, £500,000 and £1 million will now be facing an ATED charge of £3,700 each year.

There are fixed revaluation dates for all properties falling within the regime. Properties held at 1 April 2022 will need to be revalued at that date and this will form the basis of the charge for 2022/23.

An ATED return will have to be filed with HMRC every year even if the company qualifies for one of the tax reliefs available for holding certain types of residential property. This reporting requirement could potentially catch farmhouses and employee accommodation held in genuine farming or estate companies.

9. Restrictions to income tax interest relief (6 April 2017)

Up until 6 April 2017 landlords could claim a full income tax deduction for allowable finance costs (e.g. mortgage loan interest, arrangement fees, repayment fees, etc..) relating to buy-to-let residential property. A higher rate (40%) tax payer with annual mortgage interest of £10,000 on their buy-to-let property could, therefore, receive income tax relief of up to £4,000 (£10,000 @ 40%) each year.

The Government introduced new rules from 6 April 2017 restricting the tax relief on all allowable finance costs for landlords. The rules have been phased in over 4 years.  Income tax relief is now restricted to the basic rate of income tax (20%) with effect from the start of the 2020/21 tax year. These restrictions apply to individuals, partnerships and trusts, and apply equally to residential property situated in the UK and worldwide.

10. Property income allowance (6 April 2017)

From 6 April 2017 individuals with gross income arising from property of under £1,000 in a tax year are not subject to income tax and have to report the income to HMRC. Where an individual has rental income in excess of £1,000 in a tax year he or she is able to elect to either deduct the property allowance or the actual allowable expenses relating to the property.

11. Extension of the UK inheritance tax regime to indirectly held property (6 April 2017)

The Government introduced legislation with effect from 6 April 2017 to bring the value of UK residential property held indirectly (e.g. by a company or trust) into the UK inheritance tax (‘IHT’) regime. The measure is designed to target non-UK domiciles who indirectly own UK residential property through company and/or trust structures, which were not previously subject to UK IHT.

Disposal

12. Sale by non-UK residents (6 April 2015)

From 6 April 2015 the UK capital gains tax (CGT) regime was extended to cover capital gains arising on the disposal of UK residential property by certain non-UK residents. No UK CGT was previously reportable or payable by non-UK residents on the disposal of UK property.

The CGT regime applies to capital gains arising on the disposal of all residential properties, regardless of value, by non-UK residents. The general principle is that only the proportion of any capital gains attributable to the period after 5 April 2015 will be potentially subject to UK CGT. Non-UK residents have 30 days from the completion of the sale to file a tax return and pay any CGT.

Since 6 April 2019 non-UK residents have been subject to UK CGT on the disposal of all UK land and property.

Please see our article on non-UK residents and CGT on the disposal of UK property for further information.

13. Abolition of CGT for companies selling residential property (6 April 2019)

Companies caught in the ATED regime (please see 2. and 8. above) were previously subject to a 28% CGT charge on capital gains arising on the disposal of residential property situated in the UK with a market value in excess of £500,000.

The extension of non-UK resident CGT to cover all post 5 April 2019 UK property disposals (please see 12. above) resulted in the abolition of this ATED CGT charge from the start of the 2019/20 tax year onwards.

14. Restrictions to principal private residence relief exemptions (6 April 2020)

Reforms to the rules for CGT principal private residence relief for capital gains arising on the disposal of a taxpayer’s main residence came into effect from 6 April 2020. From that date (i) lettings relief only continues to be available where the owner ‘shares occupancy’ with the tenant; and (ii) the final period of ‘deemed occupancy’ exemption has been further reduced from 18 months to 9 months.

15. Payment of CGT liabilities (6 April 2020)

UK residents were brought into line with the current CGT reporting and payment requirements for non-UK residents with effect from 6 April 2020. From the start of the 2020/21 tax year onwards UK residents have been required to file a return and settle any CGT liability arising on the disposal of UK residential property within 30 days.

CGT arising on the disposal of residential property by UK residents was previously payable by 31 January following the end of the tax year in which the disposal took place. This meant that there could be from 10 to 22 months between receipt of the sale proceeds and the actual payment of CGT.

The new rules have removed the previous cash flow benefit and aligned the timing of tax payments with individual taxpayers subject to income tax under the PAYE regime.

Please see our article on non-UK residents and CGT on the disposal of UK property for further information.

We’re here to help

It is always important to consider the tax implications on the acquisition, ownership and disposal of any interest in property. Simple and effective advice given at the earliest opportunity can help ensure you minimise your tax exposure and protect your interests while maximising the benefits of property ownership.

Anderson Strathern has a large team of tax and property specialists who are able to provide you with practical, commercial and tax-effective solutions to help safely guide you through this ever changing landscape.

For further advice, please contact Martin Campbell, Alison Pryde, Alasdair Johnstone or Sara Jalicy, or speak to your usual Anderson Strathern contact.

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