In a year where we have been confined to our homes and with many property transactions on hold, it’s easy to forget that there have been some pretty substantial changes to the tax consequences of buying and selling property in recent times.
Here is a short recap of the residential property taxes which now apply.
Capital gains tax returns
One of the biggest changes is that if an individual sells UK property, it may now be necessary to submit a return and pay any capital gains tax (CGT) due within 30 days of completion of the disposal.
If you are a UK resident, this new rule is only likely to apply where you sell a UK residential property which isn’t your main home (eg a buy-to-let property or a holiday home). Although, if the grounds of your own home are more than 0.5 hectares or there is some business use of the property or there has been a period when you did not occupy it, you will need to consider whether there is a chargeable gain to report.
The requirement is that a return should only be submitted if there is any CGT to pay. It’s therefore important to crunch the numbers before finalising the transaction to determine whether a return is needed.
If you are not UK resident then these requirements apply in relation to all sales or disposals of all UK property or land, residential or commercial, regardless of whether there is a capital gain on disposal.
Even a gain on the sale of shares of an offshore company which derives at least 75 per cent of its value from UK property is subject to UK CGT.
Main residence relief
As was seen in the last recession, there can be a spike of ‘accidental landlords’ if the property market dries up. For example, this could be because someone has bought a new home but has not yet been able to sell their old one.
In the not-so-distant past, individuals in these circumstances had 36 months to sell the old property before any capital gain on it might become taxable.
After a series of reductions, that time period since 6 April 2020 now stands at a miserly 9 months.
Despite calls for change because of the coronavirus pandemic, at the time of writing, no such changes have been announced. So, for those caught, it might be worthwhile reviewing the CGT position of the former home.
Stamp duty land tax (SDLT)
In a similar vein to the main residence relief situation, those who have moved house without first selling their former home typically have to pay an additional 3 per cent SDLT surcharge on the price of the new property. This can then be refunded if the former home is sold within a three-year period.
Given the current difficulties in completing property transactions, RSM liaised with various media outlets to highlight this issue and following a series of articles in national press, HMRC has changed its guidance to confirm that those in exceptional circumstances can still reclaim SDLT if they go beyond the normal three-year deadline.
As a further response to the coronavirus pandemic, a temporary reduction in the rates of SDLT applicable to purchases of residential property has been introduced until 31 March 2021. In this period, most property purchases will only be subject to SDLT if the amount paid exceeds £500,000.
Property investors such as buy-to-let landlords and property investment companies can also benefit from this temporary reduction in rates. The 3 per cent SDLT surcharge rules still apply but this is likely to be the only amount due on properties purchased for less than £500,000 until 31 March 2021.
Inheritance tax (IHT)
Finally, for those who have UK residential property owned via an offshore trust or company, such property is now effectively included in the same IHT regime as all other UK residential property.
IHT will be due by the estate on the death of the owner of such offshore companies to the extent the value of the company represents UK residential property. Offshore trustees are liable to IHT on residential property held directly, or indirectly via an underlying company, on the 10-year anniversary date of the trust or when monies or assets derived from the sale of the property are paid out of the trust. Even where money is lent by an offshore trust or company to any person to buy UK residential property, the loan can be chargeable to IHT as described above.
The tax considerations when owning UK residential property have never been more complex and with so many traps, reviewing how these might impact your ownership has never been more important.