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PROPERTY TAXATION UPDATE
Property taxation has been undergoing significant changes recently. As most of us will be affected by one form or other of property taxation, our Autumn 2018 newsletter looks at where we are now and what changes are on the horizon:
- Stamp Duty
Currently, the rates of Stamp Duty Land Tax (SDLT) applying to residential property in England and Northern Ireland are as follows:
| On slice of value | Rate |
| £125,000 or less § | Nil |
| £125,001 to £250,000 § | 2% |
| £250,001 to £925,000 §* | 5% |
| £925,001 to £1,500,000 * | 10% |
| Over £1,500,000 * | 12% |
| * 15% for purchases over £500,000 by certain non-natural persons.
§For first-time buyers of property up to £500,000 there is no SDLT on the first £300,000. All rates increased by 3% for purchase of additional residential property if value is £40,000 or more. |
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The time limit for filing a SDLT return and paying any tax due will reduce from 30 days to 14 days from 1 March 2019.
First-time buyers’ relief (FTBR) applies to purchases of dwellings for £500,000 or less, provided the purchaser has never owned a property and intends to occupy the property as their only or main residence. Under the relief, such purchasers are not liable to SDLT on transactions valued at £300,000 or less. On transactions valued at more than £300,000 but less than £500,000, they are liable to pay 5% SDLT on the portion over £300,000.
FTBR applies to purchases in England and Northern Ireland. Different rules apply in Scotland and in Wales:
- Scotland – In Scotland, Land and Buildings Transaction Tax (LBTT) replaced Stamp Duty Land Tax in April 2015. More details on Scotland’s LBTT, including rates, bands and online calculators, can be found here. The Scottish parliament introduced a similar reduction to FTBR for first-time buyers, ‘Land and Buildings Transaction Tax First-Time Buyer Relief’ from 30 June 2018. More details on LBTT(First-Time Buyer Relief) can be found here;
- Wales – FTBR only applied up until Land Transactions Tax (LTT) replaced SDLT for transactions in Wales from 1 April 2018. More details on LTT, including tax rates and tax bands, can be found here.
As with SDLT in England and Northern Ireland, there is a 3% surcharge on the purchase of additional residential properties, such as buy-to-let properties and second homes, of £40,000 or more in Scotland and in Wales.
Recently, there have been rumors that the Treasury is contemplating an increase in this 3% surcharge. This comes at a time when there appears to be a general slow-down in the property market and stamp duty receipts.
According to recent HMRC stamp duty statistics the number of UK residential property transactions decreased by 0.8% between June 2018 and July 2018, and is 3.2% lower than July last year.
Industry body UK Finance reported there was a 0.6% fall in year-on-year house-purchase borrowing in July. It believes that July’s £24.6 billion gross mortgage lending, which was 7.6% higher than a year earlier, was driven largely by re-mortgaging as homeowners locked into attractive deals in anticipation of the recent base-rate rise.
The above reductions all occurred before the Bank of England’s August 2018 quarter per cent rate rise. It will be interesting to see how the property market fares once the impact of this is fully taken into account.
- Rent-a-room relief
Income from renting out a furnished room in a main residence to a lodger can qualify for an automatic ‘rent-a-room relief’ tax exemption, if the income, before the deduction of any expenses, is no more than £7,500.
If gross rental income exceeds £7,500, the automatic exemption will not apply. However, in that situation, it’s possible to elect instead for the taxable amount to be the gross rent received, plus any payments received for meals and services, less £7,500.
Whilst this relief is aimed at providing a tax break to those renting a room in their home to a long-term lodger, the Government has always acknowledged that it has also effectively been available to those letting their home for short-term or holiday lets.
However, following a recent review, the Government has now decided to try to ensure that this relief is better targeted at longer-term lettings. A new shared occupancy test will apply from 6 April 2019. This test is intended to restrict the availability of rent-a-room relief to live-in landlords, who will be required to be resident in the property and physically present for at least some part of the letting period. To satisfy this condition, the landlord or a member of their household must have the use of the residence as sleeping accommodation.
This means that income from letting out a whole property won’t qualify for relief unless the landlord or certain members of their family – spouse/civil partner, children or their spouses/partners, parents or dependents – remain in the home for all or part of the time they let out the ‘room’.
Note that the term household would normally also include domestic staff and guests, but for this purpose it will not include a person who is a member of the landlord’s household only by reason of being an occupier under a letting, an employee or both.
- Phasing out of mortgage interest tax relief for landlords at the higher and additional rates
Up until 5 April 2017, mortgage interest could be deducted in full from rental income to determine a landlord’s taxable profit.
However, the Government started to phase out income tax relief at the additional and higher rates on qualifying mortgage interest from the 2017/2018 tax year. The relief reduces by 25% a year over a period of four years. This means that in 2017/2018, only 75% of a landlord’s mortgage interest could be deducted from their rental income, in 2018/2019 its only 50%, and in 2020/2021 there will be no deduction for mortgage interest.
Also, from 2017/2018, for that part of the mortgage interest that falls under the new system, basic rate tax relief will only be given by way of a 20% basic rate tax credit for deduction against tax payable.
| Tax year | Mortgage interest deductible from rental income under the old system | Mortgage interest qualifying for 20% tax credit under the new system |
| 2017/2018 | 75% | 25% |
| 2018/2019 | 50% | 50% |
| 2019/2020 | 25% | 75% |
| 2020/2021 onwards | 0% | 100% |
As a result, the level of taxable income that a landlord has will increase, which, in turn, may affect entitlement to allowances and tax thresholds, such as the High-Income Child Benefit charge, personal allowances, annual allowances for pension plans and whether chargeable event gains and capital gains suffer higher rate tax or not. And it could potentially push taxpayers into a higher tax bracket.
Shorter CGT payment window for residential property gains
Currently, capital gains tax (CGT) is normally payable by 31 January following the end of the year of assessment in which the gain arose. So, for example, for a gain made on 1 September 2018, CGT is due on or before 31 January 2020.
The Government would like tax to be paid much sooner in respect of capital gains that arise when a residential property, such as a second home or a rental property, is sold or otherwise disposed of, particularly as such gains can be significant. Whilst it’s still reflecting on consultation feedback, it seems likely that, from 6 April 2020, a return in respect of the disposal of a residential property made by a UK resident will need to be delivered to HMRC within 30 days following the completion of the disposal, and a payment on account will have to be made at the same time.
The self-assessment calculation of the amount payable on account will take the individual’s annual exemption and any losses into account. The rate of CGT payable will be determined after making a reasonable estimate of the amount of taxable income for the year.
One odd effect of this change is that CGT on a gain made in the tax year 2019/2020, which is due for payment by 31 January 2021, could be paid later than CGT on a gain made between 6 April and 31 December 2020 in the following tax year, 2020/2021.
However, there are a few situations where the new reporting and payment requirements will not apply for disposals by UK residents. These are:
- where the gain on the disposal (or the total gain if more than one property is sold) is not chargeable to CGT – for example, if the gain is covered by private residence relief, unused losses or the annual exempt amount; or
- if the gain is from the disposal of a foreign residential property in a country covered by a CGT double taxation agreement; or
- if the gain arises to a person taxed on the remittance basis.
Currently, for non-UK residents (including UK residents that make disposals in the overseas part of a split tax year), when a return reporting a disposal of a UK residential property must be made to HMRC, the return and payment is already due within 30 days of the disposal being completed. The reporting requirement will be extended, from 6 April 2019, to include companies.
- Higher capital gains tax rates on buy-to-let property and second homes
The current CGT rates that apply to most taxable capital gains are 10% for gains that fall within the available basic rate tax band, and 20% on the balance.
However, this is not the case for gains made on disposals of UK residential property that do not qualify for private residence relief, such as buy-to-let investments and second homes.
Such gains are taxed at the higher rates of 18% and 28%, which for an additional rate tax payer results in as much as £8,000 extra in tax on a gain of £100,000. This can make buy-to-let investments less tax-efficient compared to holding a portfolio of stocks and shares or unit trusts.
The 28% rate also applies to non-relievable gains made by trustees on disposals of residential property.
- Extension of CGT to disposals by non-UK residents of all UK property
From April 2019 non-UK residents will be subject to tax on disposals of all UK property. These changes effectively extend the rules that currently apply to non-UK residents on disposals of UK residential property.
All non-UK resident persons’ gains on direct disposals of UK land will be chargeable. The rate of tax will be the same as for UK residents (ie. the normal CGT rates will apply to individuals and the corporation tax rate to companies).
Indirect disposals of UK land by non-UK residents will also be chargeable. This applies when a non-UK resident investor disposes of an interest in ‘property rich’ entities (such as companies, partnerships and property unit trusts) and at the date of disposal, or at any point in the two years prior to that date, the non-UK resident holds, or has held, a 25% or greater interest in the entity.
A ‘property rich’ entity is one that derives 75% or more of its gross asset value from UK property. However, to alleviate concerns that real-estate rich trades, such as retail and hotel chains and utility companies, could fall within the scope of a property rich entity, the Government has added a trading exemption.
The Government will counter tax advantages where arrangements have been entered into to avoid, or benefit from, these rules.
However, two issues are still being considered:
- The impact on exempt investors in offshore funds, where the rules as proposed could cause them to be taxed at the level of subsidiary holdings; and
- The potential for economic double taxation, due amongst other things to the indirect disposal rules, when disposals were made at a lower tier of a fund structure and the proceeds passed up to investors.
The Government is exploring, with relevant stakeholder groups, how best to produce a set of special rules that address both the taxation of exempt investors and multiple taxation within fund structures.
- Corporation tax on UK property income of non-UK resident companies
Broadly, from 6 April 2020, non-UK resident companies that carry on a UK property business, or have other UK property income, will be charged corporation tax on that income rather than being charged income tax.
- The annual tax on enveloped dwellings
Many buy-to-let investors will now be buying buy-to-let properties via companies in order to obtain full tax relief for mortgage interest paid on loans used to purchase the property.
The annual tax on enveloped dwellings (ATED) is payable mainly by companies that own UK residential property valued at more than £500,000. The dwelling is said to be ‘enveloped’ because the ownership sits within a corporate wrapper or envelope. The ATED is charged in respect of chargeable periods running from 1 April to 31 March each year.
There is a particular exemption which means that no tax charge will arise if the property is let on market terms to a person who is not connected with the company. So, this will exempt many buy-to-let investors from the ATED tax charges.
However, if the value of the property for ATED returns purposes is £500,000 or more, an ATED tax return must be made and the exemption claimed. Otherwise penalties may be incurred.
The ATED charge originally applied to property valued at more than £2 million. This reduced to £1 million in 2015/2016, and to £500,000 for 2016/2017 onwards. Where applicable, the annual tax charges for the three tax years up to and including 2018/2019 are:
| Property value | Annual tax 2016/2017 | Annual tax 2017/2018 | Annual tax 2018/2019 |
| £500,000 to £1,000,000 | £3,500 | £3,500 | £3,600 |
| £1,000,001 to £2,000,000 | £7,000 | £7,050 | £7,250 |
| £2,000,001 to £5,000,000 | £23,350 | £23,550 | £24,250 |
| £5,000,001 to £10,000,000 | £54,450 | £54,950 | £56,550 |
| £10,000,001 to £20,000,000 | £109,050 | £110,100 | £113,400 |
| £20,000,001 and over | £218,200 | £220,350 | £226,950 |
Note that there are fixed revaluation dates for all properties regardless of when the property was acquired. These are every 5 years after 1 April 2012, for example at 1 April 2017, 1 April 2022 and so on.
A valuation is necessary when the property is purchased, and this value will normally apply until the next fixed valuation date. This means that:
- For those properties owned on or before 1 April 2012, they will have had an initial value at 1 April 2012 and the property will have had to be revalued on 1 April 2017;
- For those properties acquired after 1 April 2012, but on or before 1 April 2017, they will have had an initial value at the date the property was acquired, and the property will have had to be revalued on 1 April 2017;
- For those properties acquired after 1 April 2017, but on or before 1 April 2022, they will have had an initial value at the date the property was acquired, and the property will have to be revalued on 1 April 2022.
The 1 April valuation applies for the following ATED year and the next four ATED years. So, for example, the 1 April 2017 valuation will apply for the 2018/2019 ATED year and all ATED years up to and including the 2022/2023 ATED year.
A revaluation is also required to be made if part of a property is disposed of (for example, a small parcel of land, or by granting a lease) or if a property is newly constructed or has been altered to become a new dwelling.
Note that it is only an acquisition of a right in or over land which is relevant and so millions could be spent developing a property without triggering a new valuation at that point. However, obviously the expenditure could result in the property moving into a higher ATED band on the next 1 April valuation (or earlier valuation event, such as a part disposal.)
9. UK register of foreign property-owning companies
The Government confirmed in December 2017 a timetable for the introduction of a new beneficial ownership register of overseas companies that own UK property.
The register is a part of the UK’s anti-corruption strategy for years 2017-2022. The register’s primary objective is to prevent and combat the use of land in the UK by overseas entities for the purposes of laundering money or investing illicit funds by increasing transparency in overseas entities engaged in land ownership in the UK.
A draft Bill was published in July 2018, with the intention that a register will be operational by 2021. Overseas legal entities (including corporations as well as trusts) that wish to own land in the UK will then be required to provide information on their beneficial ownership.
Once registered, an overseas entity will obtain an overseas entity ID and will be required to update their information annually, until such time as it successfully applies to be removed from the live register of overseas entities.
Beneficial owners of UK companies are already required to be disclosed to Companies House under the Persons with Significant Control (PSC) Regulations.
In order to register title to land, an overseas entity will have to be registered with Companies House and have complied with the above updating duty outlined in the Bill – the entity will then be referred to as a “registered overseas entity”. Although registration is in theory voluntary, the Bill provides that not doing so will result in:
- an overseas entity being unable to register as a proprietor of land in the UK (necessary for obtaining full legal title) via the three land registries of England and Wales, Scotland, and Northern Ireland; and
- certain dispositions made by an overseas entity registered proprietor being incapable of registration at the land registries.
In practice, this means that a failure to register with Companies House, or to comply with the updating duty, will in most cases affect the ability of the entity to either sell or lease the land, or create a charge over it, as the person to whom the property is conveyed would be unable to register the disposition with the relevant land registry in any part of the UK and therefore be reluctant to transact with the overseas entity.
The new requirements will apply to leases of over seven years in England and Wales and to leases of over 21 years in Northern Ireland. The length of the term in Northern Ireland differs from the seven years for England and Wales because leases of under 21 years in Northern Ireland do not usually have to be completed by registration. For land transactions in Scotland, lease has the meaning given by section 113(1) of the Land Registration etc. (Scotland) Act 2012.
Consultation on this draft Bill closed on 17 September 2018.
- ISAs
Help to Buy ISA
According to a recent Government press release, more than 1.2 million people have opened a Help to Buy ISA account and its statistics show that:
- the average Help to Buy bonus claim has reached £800, a new record; and
- 146,753 property completions have been supported by the scheme, which has helped to finance properties worth £25.3 billion in total.
The Government introduced the Help to Buy ISA in the 2015 Budget. It’s available to UK residents over the age of 16 for a temporary period of four years, which started in December 2015 and ends in November 2019.
Savers can open accounts with an initial deposit of up to £1,200 and are then able to save up to £200 a month. They can receive a tax-free Government bonus equal to 25% of the amount saved (including interest) when funds are paid on completion of the purchase of a first home costing up to £250,000 (£450,000 in London).
The Government contribution is capped at an overall maximum of £3,000 (i.e. on £12,000 of savings) and subject to a £400 de minimis amount, meaning that savers must save a minimum amount of £1,600 to receive any bonus.
Savers, can’t have another active cash ISA in the same tax year. If they have opened a cash ISA the same tax year, they can still open a Help to Buy ISA but will have to transfer £1,200 from their cash ISA to their Help to Buy ISA, and the balance of their cash ISA to another account. They can still save into a stocks and shares or portfolio ISA.
Lifetime ISA
First-time buyers (and others saving for the long term) can also save through the Lifetime ISA, which enables those between the ages of 18 and 40 to save up to £4,000 in each tax year with the added benefit of the Government providing a 25% bonus on the contributions paid in a tax year at the end of that tax year.
With 1.2 million investors, the Help to Buy ISA seems to be faring somewhat better than the Lifetime ISA.
The Government’s original Tax Information and Impact Note for the Lifetime ISA estimated that over 200,000 accounts would be opened in the first year to 5 April 2018. However, in May, John Glen, Economic Secretary to the Treasury, confirmed that initial reports to HMRC for the 2017/2018 tax year showed approximately 170,000 accounts were opened. Although, he did add that the Government expected the final figure for 2017/2018 to change as a result of the receipt of late or amended returns from providers.
In answer to a call from one Labour MP to make an assessment of the potential merits of closing the Lifetime ISA to new entrants, Mr. Glen simply said
“The Government keeps all aspects of the tax system under review. Where appropriate, future changes may be made through the annual Budget process.”
There may well be more said on the topic of ISAs in relation to property in the Autumn Budget.
Of course, the idea of a new Care ISA has already been mooted by the Government. It has been suggested that this new ISA would be earmarked to finance care costs, but to the extent that any funds remained on death, they would be exempt from inheritance tax.
The Government may also use the Autumn Budget to make another attempt at tackling the whole area of long-term care. Although, no doubt they will wish to avoid a repeat of the furor caused by their original 2017 Manifesto proposals on the family home in relation to long-term care!
It seems likely that property tax in one form or another will continue to be a prominent Budget feature – we await the next instalment with interest.
The value of tax reliefs depend upon individual circumstances and tax rules may change. The FCA does not regulate tax advice. This newsletter is provided strictly for general consideration only and is based on our understanding of law and HM Revenue & Customs practice as at August 2018. No action must be taken or refrained from based on its contents alone. Accordingly, no responsibility can be assumed for any loss occasioned in connection with the content hereof and any such action or inaction. Professional advice is necessary for every case.
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