Big tax changes ahead for property investors
Forthcoming changes to Capital Gains Tax on property will affect many investors, especially those with multiple properties. Paul McGrath, our Accounting Manager, explains.....
The Government has been methodically increasing the tax burden on property investors in recent years, and in April another significant change to the rules will take effect. Anyone selling or disposing of a property, either residential or commercial, other than their main residence will have to declare any capital gains that they have made on the sale and pay the tax due within 30 days of the date of the transaction.
Generally speaking, there is no capital gains tax to pay on the sale of a residential property which is your main residence. You are, however, liable for tax on gains made on the sale of second homes, investment properties (such as buy-to-lets) or commercial properties. The tax on residential property is at a higher rate than for the sales of other assets, either 18% (basic) or 28% (higher), compared to 10% and 20% for assets such as shares or investment funds, and also for commercial property.
At present these gains are reported under self-assessment, with your tax return needing to be completed by January 31st of the year after the end of the tax year, and the tax paid on the same date. This means that if you sold a property today (February 2020), you wouldn't need to pay any tax due until January 31st, 2021, nearly a year after its sale.
Indeed, if you had sold the property last April (at the start of the 2019-20 tax year) you would have a long period of up to 21 months before the tax had to be paid. The current system also allows you to list all of the assets on which you've made gains on one schedule, and offset any losses against them to reduce your total tax bill. So if you sold a house for a profit in April 2019, and then sold another one at a loss in March 2020, your tax would take both of these transactions into account in one calculation and you would make one payment of tax.
This system will still apply for shares and other assets, but new rules that come into effect on 6th April 2020 will affect any UK investors who sell a property after that date.
Under these rules, a return will need to be made to HMRC for each transaction, and any capital gains tax will have to be paid within 30 days. These rules already apply to non UK residents selling property in the UK, and are now being extended to all UK taxpayers.
The changes will particularly affect people with significant property portfolios, especially those carrying out frequent transactions. Not only will the tax be payable a lot earlier, but the gain will need to be estimated and reported correctly if the seller is to avoid penalties. This could dramatically affect cashflow for some investors, and will undoubtedly increase the amount of paperwork and record-keeping required. It's probably no surprise that we are seeing a number of investors reducing their property holdings as the raft of new rules begins to bite, and our Financial Planning colleagues have been helping some clients to reposition their assets in order to continue to generate the returns they require to meet their goals.
If you are in the position of selling a second property after April, or if you're thinking of buying an investment property with the object of capital gain, it is essential that you get good advice. We have lots of experience working with multiple property owners, and we can help you to plan for, report on and potentially reduce your tax bills by using relevant exemptions and helping you to time transactions successfully. Speak to our Accounting Team or contact us for more information.