Date posted: 15th Jul 2020
Following the Chancellor’s recent announcement regarding the cut to stamp duty land tax (SDLT), the UK residential property market is expected to see an increase in transactions in the coming months.
However, aside from SDLT, there are a number of other tax considerations for both buyers and sellers of UK residential property, particularly if the property transaction involves a property which is not a main residence.
From a seller’s perspective, you will need to consider:
1. 30 Days Reporting of capital gains
It is now a requirement for any capital gains to be reported within 30 days of the sale of a property. In addition, any capital gains tax due on the sale of the property, must be paid within the same timeframe.
The gain on the property is usually calculated as:
• Sale proceeds
• Less cost
• Less professional fees of acquisition and sale
• Less SDLT paid on purchase
• Less costs of enhancing the property’s value (adding extensions, loft conversions etc).
It is a common misconception that the mortgage balance can be deducted for tax purposes.
In addition, it may be necessary to gather information regarding other capital disposals (sale of company shares, other properties, land etc) in the same tax year and consider any capital losses available from earlier tax years.
Gathering the above information can be time consuming and should be undertaken well in advance of the property completion.
HMRC will be aware of the sale from the SDLT form submitted by the buyer so please do not ignore the completion of the CGT return. Penalties and late payment interest will apply in relation to late filed Returns.
2. Separation and divorce issues
It may be that the sale takes place following the separation or divorce of a married couple.
If so, and the property sale / transfer takes place after the tax year of separation, then there may be unforeseen tax charges that need to be considered and factored into any settlements.
3. Inheritance Tax (IHT) valuation
If the property being sold, forms part of the estate of a deceased person, then there may have been a fall in value of the property that can result in an IHT saving.
4. Investment / Second home
If you are buying as an investment or a second home then you too can benefit from the SDLT cut. Whilst the 3% supplement still applies for the acquisition of second homes and buy to let (BTL) properties, the SDLT charge on property purchases up to £500,000 is capped at 3% of the property’s value.
Thus, a landlord that was looking to acquire a new BTL property, for say £250,000, before the recent cut, would save £2,500 in SDLT. This is a significant sum of money to save, particularly if they were going to buy the property in any event.
5. Reporting rental income
We meet many new clients who have received rental income but have never declared the income as they have “never made a profit.” However, they usually base their profit calculations on the rent less the monthly mortgage payment, which is a capital repayment mortgage.
However, the capital element of any mortgage repayment cannot be taken into account when working out the amount that is liable to tax. In addition, since 6 April 2020, mortgage interest cannot be deducted from the rental income either and instead is relieved at 20%. It is therefore very important to ensure that rental income is reported to HMRC on a Tax Return.
6. Method of acquisition
Due to cuts in tax relief for mortgage interest, briefly mentioned above, many landlords are looking at different ways to own investment properties.
We have many discussions with clients in relation to ownership via a limited company or setting up an arrangement whereby the lower earning spouse is taxed upon the rental income. It is important that consideration is given to such planning at the outset and dealt with timely and properly, otherwise there can be significant professional fees (and taxes) incurred in changing the nature of the ownership further down the line.
We are well versed in all aspects of property taxation and should you need specific property tax advice, please do call our tax experts or contact us here.
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