Is now the time to buy a second home or investment property?
The latest tax implications of a second home or investment property
The Stamp Duty Land Tax (SDLT) holiday may have piqued the interest of those thinking of investing in UK residential property. However the tax rules for residential property have changed significantly in recent years, so it is worth understanding the current tax position and how it will impact your personal finances, before making an offer.
Stamp duty – the SDLT holiday applies on the first £500,000 of property value, and lasts until 31 July 2021. The additional 3% charge on a second property is unaffected, but the saving can still be significant. On the purchase of a second property for £500,000, the SDLT cost will fall from £30,000 to £15,000.
Income tax – the valuable 10% wear and tear allowance ended in April 2016, and Replacement of Domestic Item relief was introduced. In most cases this reduces the tax relief for furnished properties and increases the administrative burden of recording expenses.
Restricted finance costs – in April 2017 finance costs (e.g. mortgage interest) ceased to be deductible in full against property income, and instead relief is given as a basic rate reduction. The change has been introduced over a 4 year period, with the full effect felt from 2020/21. In some cases, there may not be a ‘profit’ if you look just at the cash flow, but when the rental profit is calculated in line with the tax rules, tax may still be due.
CGT and 30 day reporting – on the disposal of most assets, the Capital Gains Tax (CGT) rate is 10% or 20%, however for gains on residential property, the tax rate is higher (18% or 28%). With effect from April 2020, this disposal also needs to be reported to HMRC within 30 days of disposal, with the tax due to be paid within the same 30 day deadline. [LINK]
CGT reliefs – if you live in a property as your main residence, Principal Private Residence (PPR) relief may be available to reduce the taxable gain. The period of deemed occupation before disposal has been reduced from 18 months to 9 months. This is relevant if you move out of the property before disposal. In addition, the valuable ‘lettings relief’, which could reduce the taxable gain by up to £80,000 for a couple, is restricted from April 2020 to cases where the property owner and tenant share occupancy of the property. This effectively abolishes the relief for buy-to-let investors.
Making tax digital – there is a long term objective to introduce a requirement to report profits, and pay tax, on a quarterly rather than annual basis. This means the tax is paid sooner than under the current self-assessment regime (good for HMRC), but increases the compliance burden and potential risk of late filing penalties for landlords (bad for taxpayers). Making tax digital has been delayed as there have been more urgent matters to deal with (think Brexit and Covid), but has not been completely removed from the agenda.
Non-UK resident – if a non-UK tax resident owns a UK rental property then the agent or tenant (if there is no agent) has a responsibility to deduct 20% of the rent and pay it over to HMRC. The alternative is to make an application under the Non-Resident Landlord Scheme (NRLS) which means that rent can be received without a deduction of tax at source.
Other considerations – there can be tax advantages to meeting the conditions of a Furnished Holiday Let (FHL) but these will need to be weighed up against potentially higher vacancy or cleaning costs to ensure the property is Covid safe. If several investment properties are owned, it may be advantageous to own these via a company structure, or incorporate an existing property partnership.
The investment risk of owning property should be taken into consideration, with advice taken as necessary. At present, experts are predicting a fall in prices this year, but with property prices expected to recover in the longer term.
If you would like to discuss your own tax position and the purchase, rental, or disposal of residential property, please get in touch.