Property tax update for UK residential property landlords

Mark Stemp, Partner, Private Clients

There have been many residential property tax changes implemented by the government in the last few years. The changes are targeted to second home owners as well as landlords.

The current issues facing our clients are:

1. Capital Gains Tax (CGT) changes

There have been several CGT changes since April 2020:

Reduction of CGT rate
The CGT rate used for gains arising on the sale of UK residential property is higher than that for most other assets, being 18% for gains falling within an individual’s basic rate band and 28% for those in the higher and additional rate bands. From 6 April 2024, the higher rate reduces from 28% to 24%.

CGT reporting in 60 days
UK residents who sell their UK residential property which results in a payment of CGT are required to report the disposal to HMRC within 60 days of the completion date. This time limit was extended from 30 to 60 days for completions after 26 October 2021.

Payment of tax in 60 days
Where there is a reporting requirement, the tax needs to be paid within 60 days of the completion date (prior to 27 October 2021 this limit was 30 days). Any payment on account will be deducted against the total income tax and CGT liability on submission of your self-assessment tax return in the tax year of the disposal.

When you sell a property in the UK, you can deduct your tax-free allowance from your total gain. The annual CGT tax-free allowance reduced from £12,300 for the 2022/23 tax year, to £6,000 for the 2023/24, and then again to £3,000 for the 2024/25 tax year.

Couples jointly owning their property can combine their individual allowances, potentially allowing a gain of £12,000 reducing to £6,000 from 6 April 2024 before liability to pay CGT. Losses made during the same tax year as gains need to be managed to ensure that they are available to reduce the gains subject to CGT.

2. Furnished Holiday Lets (FHL)

The concept of FHLs has been around for many years and allows properties which qualify to benefit from various tax reliefs that are not generally available to other rental property businesses.

However, the 2024 Budget announced that these special rules applying to FHLs will be abolished from 6 April 2025. It means that there will be no special advantage for those who let their properties short-term as holiday lets over those to let residential properties over the longer term. Those who are affected should consider now how this may affect them from 6 April 2025.

3. Loan interest relief – Income Tax restrictions on dwelling related loans

Rules introduced from April 2017 exist to restrict the tax relief that can be claimed by higher rate taxpayers who use loans to finance residential buy-to-let properties. The effects of these rules were phased in over a four year period. From 2020/21 onwards, all financing costs incurred are disallowable in calculating the rental profit for the year and instead will be relieved as a basic rate tax reduction only in calculating your tax position.

Where the rental business does not generate a profit or is covered by brought forward losses or by reliefs (personal allowance) from the 2020/21 tax year, the amount of mortgage interest costs is not utilised as a basic rate tax deduction. These unrelieved costs will be carried forward and relieved in future years where a taxable rental profit arises.

These rules can particularly impact owner managers whose income is paid in the form of dividends from their company, as tax relief is not available against taxes paid on investment income.

HMRC is known to send nudge letters to taxpayers on this subject, intended to prompt a review of the relief claimed to ensure it is correct.

Clients are taking action following the changes to loan interest relief and are considering the following:

• ownership of the property
• setting up Trusts
• setting up companies (see later).

It is important to take advice to understand how these changes will affect you.

4. Stamp Duty Land Tax (SDLT)

Reminder of different rates

There remain a number of different ways to calculate SDLT, which can give a better outcome than using the standard SDLT rates. They include:

Multiple Dwellings Relief (MDR) –Abolished with effect from 1 June 2024, there may still be a small window to claim this relief if you are within the 12 month amendment window for a transaction which completed prior to the introduction of the new rules. To see if you may have had a qualifying purchase see our article Multiple Dwellings Relief – Have you got a separate dwelling?
Mixed rates - When purchasing a mix of residential and commercial property, such as estates with outbuildings and shops with flats, it is possible to apply the non-residential rates of SDLT which are lower than the residential rates.

Repayment of the 3% surcharge

If you purchase a home before you are able to sell your existing home, you are required to pay a 5% SDLT surcharge (increased from 3% following the October 2024 budget). If you sell your former main residence within three years, you are able to re-claim the 5% SDLT paid. There is a time limit to make a claim:

12 months from the date you sell your previous main residence
12 months of the filing date of your SDLT tax return, whichever comes later.

5. Inheritance Tax for landlords and second home owners

Property is usually the most valuable asset class in a property owners’ estate on their death. Inheritance Tax (IHT) at 40% on the value is typically paid on those with assets exceeding the nil rate band. It is important to understand what would happen in the event of your death, both in terms of who is to inherit the asset but also the amount of tax to be paid by your estate. If you wish to estimate your IHT exposure please use our IHT calculator.

There are many planning ideas to consider, including gifting strategies. More information can be found on our Inheritance tax hub.

6. Holding your rental business in a company

Limited company profits are chargeable to corporation tax, currently at a rate of between 19% to 25% depending on the level of profits. The 19% rate typically applies where profits in the year are less than £50,000 and the 25% applied where profits exceed £250,000, with a varying rate applying between the two. This needs to be compared to the income tax rates currently at 20% (basic rate), 40% (higher rate) and 45% (additional rate).

If the business owner chose to take profits out of the company, then, in addition to the company paying corporation tax on the rental profits, the director shareholder(s) would then also incur tax on extraction of the profits from the limited company, at either income tax rates if extracted by way of a salary at income tax rates, or dividend rates of 8.75% / 33.75% and 39.35%.There are advantages and disadvantages (such as increased administration costs) of holding your rental business in a company. It is important to take advice in order to consider all aspects and make an informed choice based on your individual circumstances.

Some clients who own a portfolio of properties in their own name choose to incorporate their business. This transfer to a company will have Capital Gains Tax and SDLT implications. There are reliefs available in certain specific circumstances.

How can we help?

With property matters, it is always important to take tax advice due to the impact property has on all areas of taxation. There are opportunities for planning which can be taken advantage of every tax year. To discuss your individual circumstances and what options are available to you please get in touch with Mark Stemp or your local Crowe contact.