In advance of the tax year end, many taxpayers often turn their attention to maximising use of their various allowances, but another aspect to consider is making sure that property ownership is tax efficient.
Spouses and civil partners can hold property in unequal shares to ensure that the lower earner is utilising their basic rate tax band. The saving is twofold – rental profits are taxed at a lower tax rate, whilst benefiting from a full deduction for mortgage interest paid on the rental property, where higher rate tax relief is now restricted. Conveyancing delays can also be avoided as there are other legal mechanisms which allow a faster transfer between spouses, such as a deed of trust. It should be noted that it will often be important to get approval from the mortgage company before undertaking any planning like this.
In addition to investment properties, people can also give their residential property a financial spring clean. Most property owners are aware of Private Residence Relief (PRR) relief, which provides that individuals do not pay Capital Gains Tax (CGT) on the sale of their main home. The legislation is not new, but the last few years have seen a raft of case law where HMRC and taxpayers have been testing the limits of what qualifies as an appropriate claim. Whilst most taxpayers are aware that there are time limits on how long a property needs to have been occupied for, HMRC has recently been testing the quality of the occupation – so whether a taxpayer has genuinely been occupying the property.
In the most recent Tribunal case [Hussain v HMRC 2022], the taxpayer claimed PRR on the sale of a former hospital, even though he owned other properties which were available for his use, his spouse had in fact never resided there, and he had never changed his registered address for utilities, bank statements or electoral roll to the property. The time of occupation was secondary to the quality of the residence there.
Taxpayers who have more than one home may have had to spend more time in one property than another due to the pandemic and this could inadvertently have had an impact on which property qualifies for tax relief on a future sale. In order to help manage this, taxpayers can use an election to nominate one of their multiple residences as their PRR. The prompt to review this is if you have a new ‘combination of residences’ – on the acquisition of a new house or change of use of an existing property. An election can be made within two years. The effect of the election is that PRR is available on the disposal of the property and potentially open the door to more relief being available on a future sale of the property.
So, as well as clearing out of physical clutter, the time is right for a financial tidy up too.