It’s clear that with the changes on the way in April 2020, the UK tax authorities are focusing heavily on UK property, particularly so if you are based or spend time overseas and rent out a house or apartment.
In years gone by renting out a home or property made good financial sense, enabling you to keep a foothold on the UK property ladder if you were overseas for a period of time, or providing an income from a second home or series of ‘bricks and mortar’ investments.
That all changes in a matter of weeks with some fairly fundamental developments seeing the need for better tax planning:
For those who have used the property as a main residence, the length of time you lived in your UK property and the last 18 months of final ownership are currently exempt from Capital Gains Tax (CGT) – a tax break which can offer a significant saving. This final ownership period is being scaled back to 9 months from April 2020, which will undoubtedly increase your CGT bill. In addition letting relief will only be available if there is shared occupancy – when you and the tenant both live in the property at the same time. In virtually all cases, this will mean you will be unable to claim the relief.
Furthermore, in times gone by all finance costs incurred have been able to be claimed as an expense but April brings with it the removal of this tax break. Tax relief will be restricted to a basic rate of 20%, bringing with it another blow to those enjoying an income from a rented UK property. And if and when you come to sell the property you’ll need to prepare a formal CGT computation and return it to the UK tax authorities within 30 days of the sale, together with any tax due.
Non-resident corporate landlords will need to pay Corporation Tax, rather than Income Tax, on any profits generated from UK property letting.
Worryingly, recent events have even seen HMRC writing to tenants in property owned by foreign landlords or overseas companies advising that they may have to forfeit their rent to help pay the owner’s overdue tax bills. The letters also request information about the tenants, as well as how long they have lived in the property.
And added to this is the current consultation which would bring an end to private landlords being permitted to give notice to tenants with as little as eight weeks’ notice after their fixed-term contracts come to an end. With 4.5 million private renters currently in the UK, this trend of increasing the rights of tenants could mean that using a UK property for rental income may become more problematic.
UK property has long been a favoured choice for many investment portfolios. Yet the tightening of legislation may mean that it makes sense to consider just how to properly approach things if you choose to let such a property.
* Any tax treatment is dependent on the individual circumstances of each client and may be subject to change in future.
To discuss any aspect of UK tax please get in touch with your nearest office.
Julian Smith, Head of Tax