Accidental Landlords Beware!

Well what a difference a day makes. That day is 6th April 2020!

This is not the first time I have mentioned this. Time is passing and I am concerned some people may be slow to take action. These changes are in the first draft of Finance Bill 2020.

These changes could have a significant impact on accidental landlords. Accidental landlords usually rent out a house, which they used to live in, as their main residence.

Principle Private Residence Relief (“PPR”)

This is a relief that automatically allows many home owners to sell their home without paying capital gains tax. Some property sales, such as those with large gardens, or partly used for business, or owned by Trustees may not automatically qualify for the relief. Unfortunately this article is not looking at PPR in detail. The key message though is, if in doubt about whether your home will automatically qualify for relief, seek advice.

PPR relief applies for the entire period that you occupy the house as your main residence. However many people own a property for longer than the time they live in it. A prime example is, someone who buys a second home or moves into a partner’s home and rents out their former home.

The current rules allow the last 18 months of ownership to qualify, even if you are not residing in the house during that time. That gives home owners a useful breathing space to decide whether they want to change their mind and move back home. That period is reducing from 18 months to 9 months from 6th April 2020. (Please note that if the owner moves into a care home, the last 36 months of ownership will be eligible for PPR).

That change, combined with the change to the rules of lettings relief mentioned below, has the potential to leave an accidental landlord with a greater tax charge if they sell the property on 6th April 2020, instead of on the 5th April 2020.

Lettings Relief

Lettings relief has the potential to relieve upto £40,000 of gain from capital gains tax. For a couple selling a jointly owned property, that is upto £80,000 (£40,000 x 2) of gain, which could be tax free. For a single higher rate tax payer, that could be a potential exposure to further Capital Gains Tax of £11,200 if they sell after 6th April 2020. (£40,000 @ 28%).

After 6th April 2020, lettings relief is only available if you live in the house, at the same time as renting it out. So I don’t see that applying to many cases.

There is no transitional relief, you cannot claim lettings relief for the years before the legislation changes. So it is available to you one day but not the next.

Reporting Deadlines

ALL UK landlords should be aware that the reporting deadline for reporting gains and paying any capital gains tax due on the sale of a residential property is changing. Non Resident Landlords have already been reporting their gains on residential properties within 30 days of disposal, on a Non Resident Capital Gains Tax return.

After 6th April 2020, the UK landlord needs to report the gain within 30 days of completion, not just on a Self Assessment tax return. Self Assessment tax returns are due on 31 January following the end of the tax year (5th April), in which the disposal took place.

So, if you sell on 5th April 2020 you need to report a property disposal on your Self Assessment tax return for tax year 2019/20 and pay any tax due by 31 January 2021, which is nearly 10 months later. Whereas, if you sell on 6th April 2020 you need to report the gain and pay the capital gains tax by 6th May 2020 on a separate return. If you already complete Self Assessment tax returns then you need to ALSO report it on your Self Assessment tax return for the tax year.

Clients often turn up in the month of January needing a Self Assessment tax return completing. For disposals after 6th April 2020, you can no longer wait till the last minute . I would always advise seeking professional tax advice, before selling a property, to ensure that you don’t pay more tax than you need to.

HMRC are seeking to collect more capital gains tax on property disposals and collect it more quickly.

So as you can see, HMRC are looking to collect their tax sooner, as well as hoping to increase the amount of capital gains tax they are charging.

If you are thinking of selling soon you may decide to bring the decision forward. If you don’t want to sell, you should seek advice to see whether you can benefit from any of the relief NOW without selling the property.

In the future, property owners should be speaking to their accountant or to a tax advisor, at the same time as putting their house on the market and definitely at the same time as instructing solicitors to deal with the sale.

This blog is to highlight the changes that will soon impact and the fact that some landlords need to seek advice, it is not a detailed article on PPR or lettings relief. Always seek professional advice for your specific situation, tax legislation is detailed and complicated.