Residential property investors are currently 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.
The most recent residential property tax measures implemented during the 2018/19 tax year were:
- An increase in the supplementary 3% land and buildings transaction tax (LBTT) additional dwelling supplement (ADS) charge in Scotland to 4% from 25 January 2019 (please see 1. below).
- An extension to stamp duty land tax (SDLT) first time buyer's relief to all purchases of shared ownership homes with effect from 29 October 2018 (please see 4. below).
There are, however, a wide range of other residential property related tax measures that are either now in force or looming large on the horizon that may catch-out the unwary. These include:
From 6 April 2019:
- Further increase to the restrictions for higher rate taxpayers for interest relief on the financing of residential property investments (please see 9. below).
- Abolition of the annual tax on enveloped dwellings (ATED) capital gains tax (CGT) charge.
Proposed with effect from 6 April 2020:
- Restrictions to certain aspects of the CGT principal private residence relief examption (subject to consultation) (please see 14. below).
- CGT arising on the disposal of residential property will become payable within 30 days of the completion of the disposal (please see 15. below).
1. Supplementary LBTT/SDLT charge (introduced 1 April 2016)
A supplementary LBTT/SDLT 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%. The UK Government has published a consultation on the introduction of a new SDLT surchage of 1% on non-residents purchasing residential property in England and Northern Ireland.
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.
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. This threshold was subsequently reduced to £1 million from 1 April 2015. 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.
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 now 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 have 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 £300,00 - £500,000 – SDLT at a rate of 5% on excess over £300,000
- Over £500,000 – Normal rates of SDLT
5. Scottish income tax (6 April 2018)
The Scottish income tax (SIT) applies to individual Scottish taxpayers with rent and other income arising from their property interests. The 2018/19 tax year was the first time Scottish taxpayers had both different income tax thresholds and two additional income tax bands when compared to the rest of the UK.
6. Removal of income tax wear and tear allowance (6 April 2016)
Landlords are from 6 April 2016 only able to 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 (less any rates payable by the landlord) irrespective of whether any costs had actually be incurred.
7. Increase of 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. Where the gross income is over £7,500 then it is possible to elect to either pay income tax on the excess amount over £7,500 or alternatively on the net income once allowable expense have been deducted.
The UK Government announced at the Budget in November 2018 that it would not proceed with the proposed 'shared occupancy' test for rent-a-room relief.
8. Increase in annual charge for companies owning residential property (1 April 2018)
An ATED 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. Previously, it was the market value of the property at 1 April 2012, but this has been updated for calculating the ATED charge for the 2018/19 period. It was announced at the UK Autumn Budget in November 2017 that ATED annual charges will increase by 3%. 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 £3,600 each year.
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 now 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 to the basic rate of income tax (currently 20%) for landlords of residential property by 6 April 2021. The new rules are being phased in over 4 years. Three quarters of all allowable finance costs will be subject to the restriction in the 2019/20 tax year. These restrictions will apply to individuals, partnerships and trusts, and will 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 or 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. The actual impact of this legislation should therefore be relatively small in practice.
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 non-UK residents. No UK CGT was previously reportable or payable by non-UK residents on the disposal of UK property.
The CGT regime now 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.
From 6 April 2019 non-UK residents will become subject to UK CGT on the disposal of all UK land and property.
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 dispoals (please see 12. above) has resulted in the abolition of the ATED CGT charge from the start of the 2019/20 tax year onwards.
14. Restrictions to principal private residence relief exemptions (6 April 2020)
The UK Government announced at the 2018 Budget that there would be a consultation on the introduction of restrictions to certain aspects of the CGT principal private residence relief with effect from 6 April 2020. If the Government's proposals came into force then (i) letting relief would only be available where the owner 'shares occupancy' with the tenant; and (ii) the final period exemption would be further reduced from 18 months to 9 months.
15. Payment of CGT liabilities (6 April 2020)
CGT arising on the disposal of residential property by UK residents is currently payable by 31 January following the end of the tax year in which the disposal took place. This means that there could be from 10 to 22 months between receipt of the sale proceeds and the actual payment of the CGT.
The UK Government announced at the 2017 Budget that the introduction of a 30 day window between capital gains arising on a disposal of residential property and the payment of CGT would be deferred by a year until 6 April 2020. This measure will remove the current cash flow benefit and align the timing of tax payments with individual taxpayers subject to income tax under the PAYE regime. UK residents and non-UK residents will have the same reporting and tax deadlines for CGT arising on the disposal of UK residential property.
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.