Capital Gains rules are changing!
If you are a property investor or “accidental” landlord this is the blog for you. From the 6th of April 2020 the changes to Capital Gains tax rules will affect the sale of second homes and rental properties.
Capital Gains Tax
Capital Gains Tax is paid at the following rates:
- 18% for the basic rate taxpayer
- 28% for the higher rate taxpayer
The current rule means that if you sell your property in the tax year, you will pay your Capital Gains Tax in the January after it is declared on your tax return. The new rule means that you need to declare the sale to HMRC and pay the Capital Gain within 30 days of the sale. This will need to be carefully planned by unsuspecting landlords.
Get your house in order
No doubt, there will be penalties from HMRC with those who do not comply. We are keeping our fingers crossed that letting agents have informed their Landlords of these new changes.
If you are a property investor and are in the position where you have not declared your rental income, please take a look at our recent blog – “Have you received HMRC’s Love Letter?”
Other changes include PPR (Principle Private Residence) Relief. This is the relief that enables taxpayers to sell their homes without having to pay Capital Gains Tax. If you buy and move into a second home, the final period of exemption for PPR relief is going to be reduced from 18 months to 9 months.
This applies to Landlords that let privately. However, with the new rules starting in April and the restriction on mortgage interest, trading through a Limited Company could be the answer for property investors for the following reasons:
- 19% Corporation Tax if you sell the property, rather than 28%.
- Full tax relief on the interest of the loan
Pros & Cons
As with most things there are pros & cons. We can help you make informed decisions on how you want to invest and join the exciting world of being a Landlord. Despite HMRC doing their best to penalise Landlords, with the correct set up and letting partners, renting property can be very rewarding.
Have you received HMRC’s ‘love letter’?
Have you declared your rental income?
Lately we have seen an increase in HMRC asking people if they have received rental income. This comes in the form of a ‘love letter’ from HMRC and results in more and more people having to declare their rental income.
The reason for receiving this ‘love letter’ is HMRC’s computer system “connect”. Connect draws data from all departments and connects you to every government system. It also looks at our digital footprint, snooping on our social medias, Ebay accounts and even Airbnb bookings. Using Artificial Intelligence (AI) the computer will asses our profiles and see if we could afford rental properties by cross referencing with your declared income on your HMRC tax account.
The ‘love letters’ we refer to are a direct result of HMRC’s Connect talking to its mates at the Land Registry. From this data they form a list of people that have sold property. If it is not listed as your main residence HMRC will put two and two together and ask if you have sold a second home and/or rental property. This will then be subject to capital gains tax and more!
Have you declared?
If the sold property was used as a rental property, HMRC will then look to see if you have declared the rental income. In a lot of cases this has not been done and can go back many years. In a recent case of ours, we had to declare 10 years of rental income for a Husband and Wife.
‘My Mate Down The Pub’
Getting tax advice down the pub is not always a good idea. In a few cases, taxpayers have been under the impression that because the mortgage payments covered the rental income they didn’t have to declare the rental income. In reality only the interest is deductible. For higher earners being able to offset the basic rate relief is being phased out, turning rental income into profit and therefore tax payable.
Beeng moved into her partner’s flat several years ago, and decided to rent out her own property rather than sell it. Being didn’t think she was making a profit which needed to be taxed, because the rental income just covered the mortgage payments.
When working out her rental profit. Being needs to be aware that the only allowable expense for her mortgage is the interest amount of her mortgage repayment.
The interest amount of mortgage payments is restricted to the basic rate of income tax, irrespective of which income tax rate Being normally pays for other income she may have
Take a look at HMRC’s website for more examples.
If you have a rental property and need a ‘health check’ we would be happy to discuss and give you the options to declare the income and profit that you have been missing off of your tax returns. Declaring the error before the ‘love letter’ arrives will help your negotiations with HMRC and reduce any high penalties.
Are you thinking of getting a mortgage?
This year we have had an abundance of clients applying for mortgages. Applying for a mortgage can be stressful and this is even more true for business owners. Once you have applied everything is suddenly urgent and happens all at once. This can then result in stress, tears and quite possibly a few temper tantrums!
To avoid any strops, here is a list of the best ways you can prepare before applying as a business owner:
- When you get the lightbulb moment that you want to apply for a mortgage, give us a call or an email. We can then offer you our advice and possibly get you in touch with an appropriate mortgage adviser. It also allows us to plan and prepare to avoid any delays.
- Mortgage lenders are going to asses your income. They will ask for your SA302/ Tax calculation which will confirm your salary and/or dividends. They will also ask for your company accounts to confirm your salary and net profits after tax but before dividends. Collating this information prior to applying for your mortgage will hopefully make the process run smoother.
- To even think about applying for a mortgage your business will need to have been trading for at least 12 months but ideally 24 months.
- The mortgage lender will look into your balance sheet. This will be to check that your assets outweigh your liabilities. If they do not, in the mortgage lenders eyes your company could be in a position that it will not lend against.
- Some mortgage lenders will average out your salary and/or dividends over the past two years. As a growing business this may not be beneficial. There are some lenders that will just consider your latest year, it is probably best to instruct a mortgage adviser to help choose an appropriate lender.
- Decreasing profits can be a bit tricky. If your profits are decreasing this also means your income is decreasing. This will result in mortgage lenders asking questions as they will be concerned that this could be a consistent problem. Before applying, it is probably best to be sure you have a strong constant source of income.
- Mortgage lenders can also ask for an ‘accountants’ certificate’. If asked for we can complete, but there is a charge!
- If using a mortgage adviser, please give us written permission to talk to them. As due to GDPR we cannot hand over any of your personal data without your permission!
TOP TIP – Plan Plan Plan. We can not stress this enough, even if it is a five year plan let us know as soon as possible so we can help you get your mortgage rather than fighting fire. Decisions over tax saving or getting your mortgage need to be made at least 12 months in advance in many cases.