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
- 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.
2. 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.
3. 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
- 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. 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).
Revenue vs Capital expenses for landlords
Capital expenditure is considered the cost of gaining or improving an asset over a longer term. This is usually a one-off purchase, and helps to improve the position of the business overall. Capital costs include the cost of purchase of the land and building itself, plus any refurbishment expenses that are not straight forward repairs. Improvements or replacement of an entire asset will be capital. An example of a capital expense would be the creation of an ensuite bathroom where there was none initially.
Capital expenditure may include:
- Purchase costs
- Delivery costs
- Installation charges
- Replacement costs
- Upgrade costs
- Legal charges
Revenue is considered a recurring expense that maintains the position of your business. The effects of the purchase are only temporary, which is why they must be done regularly. Expenses will be revenue if they constitute repairs or the replacement of part of an asset. Examples include: replacing kitchens and bathrooms, re-wiring, decorating, repairing roofs and gutters, etc.
This could include:
- Repair costs
- Maintenance charges
- Renewal expenses
- Repainting costs
The government have their own capital vs revenue toolkit to provide guidance on reporting expenditure in self-assessment forms and company tax returns, which you can see by clicking here.
Allowable expenses a landlord can claim
As a general rule, landlords can claim the expenses of running and maintaining their property, which reduces their tax bill. If the rent you charge covers services like water, or council tax, you’ll need to count the rent you charge the tenant within your income – but you can claim the costs you pay as an expense.
Some examples of allowable expenses you can claim are:
- Estate/letting agent fees
- Solicitor/conveyancing/accountants fees
- Legal fees for renewing a lease of less than 50 years
- 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
- Water rates, council tax, gas and electricity of your rental property if they are included in the rent
- Landlord insurance
- Costs of services, including the wages of gardeners and cleaners (as part of the rental agreement)
- Ground rents and service charges
- Direct costs such as phone calls, stationery and advertising for new tenants
What qualifies for the 'replacement of domestic items relief'?
The government lists a number of examples of what domestic items qualify for this new relief. These include:
- Replacement beds
- Replacement carpets
- Replacement crockery or cutlery
- Replacement curtains
- Replacement fridges, washing machines etc
- Replacement sofas
It’s worth remembering that you can only claim for a like-for-like replacement. If, for example, you bought a new fridge worth £500, but the cost of replacing your old fridge with a very similar one was only £350, you’d only be able to claim £350 relief. You can also claim for the cost of disposing items (usually electrical goods).
Need some help with this legislation?
Get in touch with Aimee Bruce, our Area Lettings Manager. She'll be happy to assist!