Disposing of Property – from April 2020

Currently, when UK residential property is disposed of, a UK taxpayer declares any capital gain made on their self-assessment tax return. The Capital Gains Tax (CGT) is due to be paid on or before the 31 January following the end of the relevant tax year e.g. a sale of a property in May 2018 would need declared on the 2018/19 tax return and the CGT due by 31 January 2020.

Since 2015, non-residents have had to inform HMRC within 30 days of a residential property sale and pay the tax at the same time.

Changes to the rules

From April 2020, all disposals of UK residential property will need to be reported and the CGT paid within 30 days of completion. A return must be made to declare the sale and calculate the tax due. If there is no gain made, or the gain is covered by exemptions or losses, no return will be required. Once a return has been made, including the estimated CGT paid, the taxpayer must file a self-assessment tax return. This has to include the property gain, by the usual deadline. The CGT already paid will be deducted when the total CGT is calculated.

There have also been changes to the reporting requirements of non-resident individuals. Instead of only having to report residential sales, they must now report sales of all property including commercial. The tax will also need to be paid within the 30 day deadline.

Getting the tax right

CGT is calculated at either 18% or 28% depending on the other income of a taxpayer. It also depends on the income tax rate bands they have available. Therefore, it is important to understand tax and be able to calculate the estimated CGT due.

Understating the CGT could result in cashflow issues. For example, an individual thinks they have paid all of the CGT, but discover they owe an additional amount of CGT when they file their tax return. This could be up to 22 months after the sale. Similarly, overstating the tax will mean that the taxpayer will need to wait until they file their self-assessment tax return to receive a refund.

How we can help

This is a brief overview of the new rules and you should seek expert advice if you have any queries. MHA Tait Walker can calculate the CGT due and submit a return on your behalf.

One of our fellow MHA member firms, MHA Macintyre Hudson, have released a blog on Capital Gains Tax planning, which you may find really useful.

Please contact Laura Dickson or Dorothy Johnston for more information or to discuss your requirements.

Property Blog Series: Episode 3 – Owning personally or through a company

The second blog in our property series looked at tax accounting and allowable expenses.

We now look at owning the property personally or through a corporate structure.

What is the difference between the different ownership routes?

Owning a buy to let property is straight forward for tax if you own it personally, you will pay Income Tax on the profits of that property business at your marginal rate of tax.  The current Income Tax rate are 0%, 20%, 40% and 45% depending on your other income, as discussed in the first blog of the property series.

Owning the property via a corporate structure means the company suffers Corporation Tax on the rental profits.  The current Corporate Tax rate is 19% and this will reduce to 17% in April 2020. You do not pay Income Tax on the profits of the rental business until you take income from the company.  Income taken from a company will be salary or dividends.

Profits are kept in the company and Income Tax is only suffered when income is taken from the company, therefore it can be a good tax strategy to leave the profits in the company until you require them at a time your marginal tax rate is lower i.e. in retirement or a break in income.

Separate legal entity

A company is a separate legal entity to you, meaning that typically you aren’t personally responsible for the company’s debts.  In the eyes of the law your finances and your company’s finances are distinct from each other. However, it is possible to become liable for the debts of the company if you provide personal guarantees in relation to the liabilities and debts of the company (and so personal guarantees should be entered into with caution).  

What are the costs of running a limited company?

A limited company needs to be registered with Companies House and accounts filed each year.  Corporation tax returns also need filed.  Other running costs may include paperwork for dividends paid as well as payroll management.

A lot of running costs are tax deductible when calculating the profits of the company.

An example of tax savings

Owning personally

Mr Smith owns a buy to let property, the rental income is £20,000 with expenses incurred of £2,000 and mortgage interest of £1,000.

Mr Smith also has employment income of £35,000.  He is currently a basic rate taxpayer and has £15,000 of his basic rate band left to use before he pays tax at the higher rate.

The tax due on the property profit is:

Rental income£20,000
Less expenses(£2,000)
Less mortgage interest(£250)

The Income Tax due on the property Income is therefore:

£15,000@ basic rate of 20%£3,000
£2,750@ higher rate of 40%£1,100
Less 75% mortgage interest basic rate credit(£150)
Total Income Tax due£3,950

Owning via a company

Mr Smith Ltd owns the buy to let property, the rental income is £20,000 with expenses incurred of £2,000 and mortgage interest of £1,000.

Mr Smith is the director and shareholder and does not take any profits from the company as he has his salary of £35,000.

The previous example showed the mortgage interest restricted, as discussed in the second blog of the property series.  The key difference here is that the mortgage interest is fully allowable by the company and is not restricted.

The Corporation Tax is:

Rental income£20,000
Less expenses(£2,000)
Less mortgage interest(£1,000)
Corporate Tax @ 19%£3,230

You will see that the tax saving here is £720 and this will increase further when the Corporation Tax rate reduces to 17% in 2020.  The tax savings would increase if Mr Smith’s salary increased and more of his rental profits were taxed at a higher rate of Income Tax.

If Mr Smith earned £50,000 salary, the Income Tax would be £6,950 and the Corporation Tax would be £3,230 making the tax saving £3,720.  As you can see, the higher your own marginal rate of tax is means higher tax savings if the company own the property and you did not take any income from the company.

Which option is best for me?

It can be advantageous for tax and legal protection if a property is held in a company.  However, depending on the level of income you take from the company, as well as the admin costs incurred for running the company, it may not be beneficial for tax in your situation.

If your plan is to build up a portfolio of properties, doing so within a company may well be the most cost effective route in the long run.   However if you only ever intend to have one or two properties and the rental income is not substantial, then the costs of a company could outweigh the benefits. 

We recommend you take professional guidance when making a decision on ownership and MHA Tait Walker will happily assist you with this.

Need extra help?

At MHA Tait Walker we have a range of specialists in this area who can answer any queries you may have and help you make the correct decision.  Please contact Ryan Keltie on 0191 285 0321 or email ryan.keltie@taitwalker.co.uk

Other episodes in this series

Episode 1 – Considering purchasing a rental property?
Episode 2 – Property ownership

Property Blog Series: Episode 2 – Property Ownership

Accounting for your property

The first blog in our property series looked at tax considerations of running a property business and your personal filing requirements as a landlord. 

We will now look at the accounting for your property business and allowable expenses for tax.

What income do I need to declare?

To determine your taxable profits on which you will be taxed, it is important to understand tax accounting.  When accounting for property income and expenses you will likely be required to use the ‘cash basis’ method rather than the previously required ‘accruals basis’ method. 

  • Cash basis means that you account for income received and expenses paid in the tax year regardless of the period they relate to. 
  • The accruals method requires you to account for income and expenses due, but not necessarily paid, in the tax year i.e. rent due in March 2019 but not actually paid until May 2019 would be taxable in the 2018/19 tax year.  Therefore it is necessary to recognise money owed and owing (debtors and creditors) and expenses relating to different accounting periods.

All landlords need to use the cash basis, unless you make an election to use the alternative method, or you meet certain conditions. For example, if rents are more than £150,000 or the property business is carried out by a company or a partnership. Cashflow and expenses should be considered when decided to make an election to use the alternative method.

MHA Tait Walker can provide more information on the conditions if required.

What expenses can I claim?

When you work out your taxable rental profit, you can deduct allowable expenses from your rental income. The expenses must be wholly and exclusively for the purpose of renting out the property so you can’t claim for personal expenses.

Anything of a capital nature i.e. putting a new roof on the property, is not allowable either. The main deciding factor in determining if an expense is capital is if it is a ‘like for like’ replacement or an enhancement to the property.

Capital expenditure can be a contentious area; something one person deems to be an improvement may actually be allowable for income tax. A good example of this would be a new kitchen to replace an old kitchen. The materials may appear to be an enhancement or improvement, but this is merely because of modern equipment used where there is no alternative. If the new kitchen is of the same standard, size and layout as the old kitchen, the incurred costs will likely all be allowable. If you were extending the kitchen and upgrading the style then this would likely be capital expenditure and not allowable for income tax.

Capital costs will be taken in to account when the capital gain is realised on the sale of the property.

Types of expenses

Maintenance & Repairs 

Maintenance and repair expenditure are typically the most common expenditure, and the definition of a repair is simply restoring an asset back to its original condition. This can sometimes mean replacing items. For example, replacing a broken door, this would be classed as an allowable maintenance and repair cost.

A point to note is should you have a landlord insurance policy in place covering the cost of some repairs to the property, expenses can only be claimed on additional repairs not covered by your insurance. 

Replacement of domestic items relief 

‘Replacement of domestic items’ relief replaced the ‘wear & tear’ allowance and is available to all landlords of residential property, regardless of whether their property is furnished or not (previously you could only claim ‘wear & tear’ on furnished lettings). It applies to moveable furniture, furnishings, kitchenware and household appliances, and allows you to claim a deduction against your tax liability equivalent to the cost of the replaced item. 

Mortgage Interest Relief Restriction 

On 6th April 2017, HMRC introduced new restrictions on mortgage interest relief on residential properties. As an individual landlord, mortgage interest is now restricted to basic rate (20%) income tax reducer and this will be phased in over four years from April 2017 as follows:

Year% of costs deducted from profits% of costs available as a basic rate deduction

This has had a major impact on the tax landscape and the way investors are now approaching this change. 

Legal and professional costs

Accountancy fees relating to the property business can be claimed as an expense against your rental income.

Insurance costs

Insurance policies relating to the property business are allowable against income.

This list is not exhaustive, so please contact us if you are concerned about claiming other expenses.

Contact us

At MHA Tait Walker, we have vast expertise and specialists in this area who can answer any queries you may have and help you make the correct decision. Please contact Ryan Keltie on 0191 285 0321 or email ryan.keltie@taitwalker.co.uk.

Other episodes in this series

Episode 1 – Considering purchasing a rental property?
Episode 3 – Owning personally or through a company

Real Estate Matters – Issue 13

Issue 13 of our Construction & Real Estate newsletter series with MHA is available now! We have worked with MHA to provide a national outlook on the issues facing the construction and real estate sectors.

Issue 13 contains articles on the following:

  • Recent UK property tax changes
  • VAT Domestic Reverse Charge
  • Employment status and off-payroll workers
  • Minimum Energy Efficiency Standards
  • Tenants fees
  • House price growth

Key information

Some key information is outlined in the publication:

MHA Real Estate Matters – Issue 13

Please click below to view the full publication.

VAT changes to hit the Construction sector – prepare now!

The new VAT “domestic reverse charge”

What is happening and when?

The new VAT “domestic reverse charge” (DRC) goes live on October 1st 2020 and it is the most significant change to VAT in construction services in 30 years. From that date, sub-contractors in a CIS chain of supply will cease to collect VAT from other contractors. In its place a reverse charge system will apply. This makes the buyer of the sub-contractors service liable for VAT accounting in place of the supplier.

Why the change?

It is now widely known that HMRC are implementing the change to combat VAT ‘missing trader’ fraud in the sector which is estimated to cost the Treasury £100m per annum.

Which services will the DRC affect?

The scope of the new legislation is wide and based on the definition of “construction operations” for CIS purposes. It encompasses construction services and associated goods supplied by contractors working on the construction, alteration, repair, extension or demolition of buildings and civil engineering works.

Please click the link to our flyer below for more information.

Original content sourced from MHA member firm MHA MacIntyre Hudson

Property Blog Series: Episode 1 – Considering purchasing a rental property?

You may be thinking about purchasing a buy to let property and have already considered the following:

  • Local market
  • Location
  • Finance arrangements
  • Tenant targets
  • Rental yield
  • Capital growth
  • Insurance (building and landlord)
  • Legal fees

However, have you considered the following tax consequences of a buy to let property?

Stamp Duty Land Tax (SDLT) in England and Northern Ireland

SDLT is due on all property purchases at the standard rates shown below.  However in April 2016 new rules were introduced meaning landlords pay an extra three percentage of SDLT on each band when they purchase a buy-to-let property.  

House PriceStandard RateBuy to Let / Second Home Rate
Up to £125,0000%3%
£125,001 – £250,0002%5%
£250,001 – £925,0005%8%
£925,001 – £1.5m10%13%
Over £1.5m12%15%

The additional SDLT rates can make a substantial difference to the standard rates, particularly if the property purchase price is high. 

For example, should you purchase a £200,000 buy to let property the total Stamp Duty payable would total £7,500, this is broken down as follows: 

Up to £125,0003%£3,750
£125,001 to £200,0005%£3,750
Total Stamp Duty Due£7,500

In addition, married couples or civil partners are seen as one unit by HMRC for SDLT.  Therefore if a husband owns a property and his wife buys a property, the additional rates for a second property would apply even though they legally own the properties separately.

SDLT is not due in Scotland and Wales, an equivalent tax is due in those countries.  Land and Buildings Transaction Tax (LBTT) is due on property purchases in Scotland and Land Transaction Tax (LTT) in Wales.  You can find the rates on the relevant government websites.

The deadline for reporting and paying the SDLT on a purchase of a property in England or Northern Ireland is now 14 calendar days. If this deadline be missed – penalties will apply. The period for paying LBTT on properties in Scotland, or LTT for purchases in Wales is 30 calendar days. 

Value Added Tax (VAT)

VAT is not due on residential properties however if you were to buy a commercial property you may be liable to 20% VAT on the purchase price of the commercial property.

Expert advice should be sought if you are considering buying a commercial property. We have a specialist team at MHA Tait Walker who can assist you with any queries you have.

Personal Requirements

An area commonly overlooked, but one of significant importance, is your personal requirements once you’ve purchased a buy-to-let property. 

In purchasing a second property, and receiving rental income, you’ll meet HMRC’s guidance on who needs to complete a tax return. The only exception to this rule is if the rental income you receive in the year is less than £1,000. 

Registering for Self-Assessment 

You will need to register for self-assessment by 5 October following the end of the tax year you started receiving rental income e.g. 5 October 2019 for a property first rented during the tax year 6 April 2018 to 5 April 2019.  By registering you’re making HMRC aware you need to complete a tax return. If this is done incorrectly you may be required to complete a tax return for an incorrect year. 

Once HMRC have processed your application you will be issued with a Unique Taxpayer Reference, otherwise known as a ‘UTR’. This is a 10-digit reference you need to complete your tax return. 

What are the Self-Assessment deadlines? 

You submit tax returns for tax years, not calendar years, and you do this in arrears. 

For example, for the 2019/20 tax year, running 6 April 2019 to 5 April 2020, you would: 

  • need to register for Self-Assessment by 5 October 2020 if you’ve never submitted a return before 
  • submit your return by midnight 31 October 2020 if filing a paper tax return 
  • submit your return by midnight 31 January 2021 if filing online 
  • pay the tax you owe by midnight 31 January 2021. Sometimes you will be required to make interim payments on account towards your future liabilities.

Failing to meet one or more of these deadlines, you will be liable to HMRC’s strict penalty charges. 

How can we help?

Here at MHA Tait Walker we can help you along the process of purchasing a property and your tax requirements, please contact Ryan Keltie on 0191 285 0321 or email ryan.keltie@taitwalker.co.ukIn our next blog of the property series we will discuss how to account for rental income and expenditure and what expenditure is allowable for tax purposes. 

Other episodes in this series

Episode 2 – Property ownership
Episode 3 – Owning personally or through a company