July 11th, 2019 / Insight posted in Articles

From boon to bust: The tax rules on property are changing

Inexperienced landlords and second home owners are largely unaware of the significant tax reforms coming into action next year, and will need guidance through sales and lettings.

HM Revenue & Customs’ (HMRC) capital gains tax (CGT) communications research report reveals how woefully unaware taxpayers are of significant changes to CGT rules on the disposal of second homes. Owners apparently do not understand the jargon used in HMRC information and end up consulting friends or even YouTube. You can imagine what might go wrong there.

The new rules from April 2020 say that when a second home is sold, the owner will have to file a return and pay the CGT due on the sale within 30 days. This is a significant change to the status quo, in which the tax must be paid by 31 January following the end of the tax year (5 April) in which the property was sold.

Experienced landlords may be reasonably familiar with the current rules and aware of the forthcoming changes. In general, though, people who own a second property are unlikely to understand the new rules and obligations.

Second-home owners, often in attractive rural or sea-side locations, are a popular target for government tax reformers. In recent years, several changes to the taxation of this category of property have been introduced, causing confusion and uncertainty for those affected in some cases.

In addition to the forthcoming CGT changes, the amount of taxdeductible interest from rental income has also been increasingly restricted year by year.

No more exemption
However, other changes are on the way for all property owners and it does not just affect people with second homes. The government is proposing to change the rules on private residence relief from April 2020. One of the proposed changes is a reduction in the final period exemption from 18-to-nine months. The final period exemption is one of several non-occupancy exemptions in the private residence rules, which ‘pretend’ the property was occupied as a main residence. This applies even if the owner was elsewhere, meaning the capital-gains tax is not due on that period.

When it was introduced, the policy aim of the longstanding final-period exemption was to allow people to have a period of non-occupancy at the end of ownership. This meant they were not charged capital gains tax for that period if there were delays to sale. That sounds pretty sensible.

With the increase in second home ownership, though, it is no surprise the final period exemption has come under scrutiny from HMRC. In response to perceived abuse, the original 36-month
length of the exemption was reduced to 18 months from April 2014, and will halve again from April 2020. The net is tightening without doubt.

‘Lettings relief from tax is also in the firing line. This boon currently applies where a house that was once a person’s main residence is subsequently rented out. The proposal is this relief will only be available where the owner shares the home with the tenant. If this rather unlikely arrangement ever happens, perhaps the relief would be better described as a Modger relief’. Whether it is
nicknamed that or not though, there is potentially a lot of change on the way that property owners may need help with. Giving peace of mind on complex property taxation matters is where advisers can provide real value, so make sure you are fully on top of what is going on.

This article was published in New Model Adviser on 8 July 2019. By kind permission from New Model Adviser reproduced on Moore Kingston Smith’s website.