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Imminent buy-to-let tax clampdown: What you need to know

24 Feb 2020
Imminent buy-to-let tax clampdown: What you need to know

The 6th April 2020 will signal the start of new buy-to-let tax clampdown rules which could provide tricky for buy-to-let investors or second homeowners who are unaware of the changes.

What you pay CGT on:

You may have to pay Capital Gains Tax if you make a profit (‘gain’) when you sell (or ‘dispose of’) property that’s not your home, for example:

  • buy-to-let properties
  • business premises
  • land
  • inherited property

What are the changes:

  1. The time you have to pay your CGT bill

At the moment you pay your capital gains tax via your self-assessment tax return so that means it does not need to be paid until the following tax year,  for example, if you sell the property in the 2019/2020 tax year, you won’t need to pay it until 31st January 2021.

However, after 6th April 2020, the vendor will need to pay the full amount of capital gains tax owed within 30 days of the completion of the sale. The tax rates have not changed, 18% for basic rate taxpayers (earning £12,001-£50,000pa) and 28% for higher rate taxpayers (earning over £50,001) it is just that the time frame for payment is MUCH SOONER so will need to be factored in by landlords or property investors who are selling for a profit.

Failure to pay within the 30-day limit will lead to penalties.

Northfields Estates explain the upcoming changes to Capital Gains Tax legislation
  1. The amount of tax relief you are able to claim

The private residence relief (PRR) means that anyone selling their primary residence will not incur capital gains (CGT) on any profit they make. This also applies to accidental landlords or those who rented out their previous main home, (which happened a lot during the 2008 financial crash) but are now selling the property.

Under the current rules, anyone in this situation is exempt from paying tax on the final 18 months that they owned the property, regardless of whether or not it was rented out.  This allowed property vendors a much wider window to market and sell their property before becoming eligible to pay capital gains tax once it sold.

As from 6th April 2020, this ‘window of opportunity’ I likely to reduce from 18 to 9 months, making it more likely that capital gains tax will be due when it is sold.

Northfields Estates explain the upcoming changes to Capital Gains Tax legislation
  1. Letting relief allowance if you were once lived in the property

It is possible that for those landlords who do qualify for private residence relief PRR, letting relief can also be claimed. Letting relief can reduce the capital gains tax you owe on a property by up to £40,000 or £80,000 for a couple.

Lettings relief reduces the amount of the gain brought into charge when you sell a property, which, at some time during the time you owned it, was your only or main home, but has also been rented out as residential (not commercial) accommodation.

The relief applies where:

  • A gain has been made on the property which private residence relief is available;
  • Part or all of the property has, at some time during ownership, been let as residential accommodation, and
  • A chargeable gain arises because of the rent received.

The amount of relief is the lower of:

  • The amount of private residence relief (PRR) available in respect of the rental
  • £40,000
  • The amount of the gain arising because of the rental

When the new rules come in from April 2020, you will only be able to claim this relief if you live in the property when it is being sold or if you share occupancy with your tenant as a resident landlord.

Under current rules there are certain costs that can be deducted from your CGT which include:

  • Estate / letting agent fees
  • Solicitor / conveyancing fees
  • Improvement costs (such as extensions, new window, roof, kitchen, heating)
  • Any qualifying buying and selling costs (such as surveyor fees)
  • The stamp duty paid on the purchase of property

Please also note that capital gains tax is only payable on a property that is owned by an individual and not by a limited company (where corporation tax is applied instead).

Northfields Estates explain the upcoming changes to Capital Gains Tax legislation

If you would like to speak to our lettings team regarding this legislation, please contact Aimee Bruce, Area Lettings Manager.