Landlord Tax Guide
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Landlord Tax Guide For the Tax Year 2020/21
Landlords face yet more taxation changes this tax year, with the phasing out of mortgage interest tax relief reaching its final stage and capital gains tax receiving a number of tweaks.
The rules which came into force at the start of this tax year could have a significant effect on the tax burdens facing property investors. Here, we explain the changes that landlords need to be aware of in the 2020/21 tax year.
Mortgage interest tax relief changes for the 2020-21 tax year
Landlords will only be able to offset 20% of their mortgage interest payments when filing their tax returns. The change marks the final chapter in the government’s tapering off of mortgage interest tax relief. From 6 April 2017, individuals allowed to deduct 75% of their borrowing costs, including interest, incurred in running their lettings business. The percentage of allowed interest reduced by 25% every year until 6 April 2020, after which point all interest paid by an individual landlord will be disallowed. Instead, they will receive a tax credit equivalent to 20% of the disallowed interest to offset against their income tax liability. The policy has been very unpopular with landlords since its inception, and many investors have cited significantly higher tax bills as a primary reason to reduce their portfolios or sell up entirely. Contact Phillips & Co Accountants Chester to find out more about how the changes could affect you.
Capital Gains Tax
The 2020/21 tax year also brings a significant change to how capital gains tax (CGT) is paid. You’ll usually need to pay CGT if you make a profit when selling an investment property, but how much you’ll pay depends on the size of the profit and your financial circumstances. Until now, landlords have been able to declare any CGT liabilities in their next annual tax return, potentially giving them well over a year to pay the bill. From April 2020, however, landlords must declare and pay any CGT liabilities using the government’s new online service within 30 days of selling the property.
The government is also tweaking the rules around private residence relief and letting relief on CGT bills. These two deductibles are only available to landlords who once lived in the investment property themselves, so they won’t apply to a large proportion of buy-to-let landlords:
Private residence relief
If you once lived in your investment property, you wouldn’t need to pay CGT for the years you lived there when you come to sell. From the tax year 20/21 you will also be exempt from CGT for the final 9 months you owned the property, even if you didn’t live there yourself. This is down from 18 months in the previous tax year.
Landlords could also benefit from CGT relief of up to £40,000 when selling an investment property that was once their home – even if they hadn’t lived in it for many years. Under the new rules, however, investors will need to live in the property themselves when they come to sell it. This change effectively removes letting relief as a deductible for the vast majority of landlords when filing their CGT returns.
How will the changes to tax relief affect you?
Highly geared investors could find they are paying tax on non-existent profits but there are some actions that might be taken to offset this.
For married couples and those in a civil partnership, joint ownership becomes particularly attractive if one of the owners is not fully utilising their personal allowance and basic rate income tax band.
For those already affected, if additional properties are acquired, it might be more tax efficient to buy them in a company.
A number of property investors are taking advantage of the fact that the interest relief restrictions do not apply to furnished holiday lettings. To qualify, properties must be available for letting for at least 210 days and actually let for 105 days but no more than 31 days to the same occupants in a tax year.
How will this affect you if you own the property through a company?
The restriction of the deductibility of finance costs will not apply to corporate landlords. A company can continue to deduct all the interest and finance costs in calculating the taxable profits of its property investment business. However, a company may find it has to pay a higher rate of interest or have more difficulty securing mortgages on its rental properties. Lenders could insist that the directors of the company provide personal guarantees before advancing loans to the company.
The advantages of investing in property through a limited company largely depend on how long you intend to hold the property for.
If your aim is to eventually leave your property to your children then holding properties in a company could be tax advantageous, especially regarding inheritance tax.
When do I need to file my tax return?
The changes we’ve described above come into force for the 2020-21 tax year, for which the self-assessment tax return deadline is 31 January 2022. The next tax return you’ll file will be for the 2019-20 tax year. The deadline for paper returns is 31 October 2020 and for online returns, it’s 31 January 2021.