Shirley McIntosh: Legal sector faces new challenges thanks to property tax changes
Shirley McIntosh, tax partner at RSM, discusses the new challenges facing the legal sector amid changes in property tax.
The start of the new tax year on 6 April 2020 will see the latest in a long line of changes in the taxation of property introduced since April 2013, from new and abolished rules, to a widening of the tax net to include non-residents.
The aim of these policies on both sides of the border was to rebalance the property market, especially for first-time buyers. The explosion of the buy-to-let market pushed prices out of reach for many, compounded by tightening of mortgage lending and increased deposits following the financial crash. Ownership of UK property through opaque offshore structures has also been considered less acceptable and been a driver of change.
Whether they have achieved their aims is a separate discussion, but what is clear is that professionals in the sector must be aware of the new rules to be able to provide appropriate advice to clients.
So, what are these changes?
Lawyers are already familiar with the changes to transactions taxes with Land & Buildings Transactions Tax in 2015 and Additional Dwelling Supplement added in 2016 for second or buy-to-let residential property, as well as residential property purchased by a company.
The Annual Tax on Enveloped Dwellings or ATED was introduced in April 2013. This is an annual tax charge for residential property owned by a company. Initially, it applied to properties valued in excess of £2m, with exemptions, but has now reduced to £500,000. Speculation continues that it may soon apply to all enveloped dwellings.
The wear and tear income deduction has been abolished in favour of the cost of replacement items for let properties but the restriction on mortgage interest relief at a flat rate of 20% has had a much bigger impact. Phased in since April 2017, with the final adjustment coming in 2020, this has hit higher rate taxpayers hard, bringing significant change with many leaving the sector altogether, reducing portfolios or incorporating.
But perhaps the most wide-ranging changes relate to capital gains.
Prior to April 2015, the UK was unusual in that non-residents could sell any UK property without paying tax on any uplift in value. Now non-UK residents, individuals, trustees and companies, pay capital gains tax on the sale of UK residential property. Only the post-April 2015 gain is taxable and tax must be paid within 30 days of completion, unless the taxpayer is already within the UK self- assessment system.
From April 2019 this provision extends to all property - residential and commercial - and includes certain disposals of interests, such as shares in property investment companies. A return of the disposal and a payment on account of the tax must now be made within 30 days of completion, regardless of whether a UK tax return has already been filed.
From April 2020, corporation tax will apply to non-resident companies, whereas previously they paid income tax and capital gains tax. With this comes more compliance, including filing a form of accounts.
Significant changes will also affect UK residents disposing of residential property from April 2020. They will need to file a return and make a payment on any gains within 30 days. If the gain is covered by private residence relief, no return is required, but there are further restrictions to be considered.
Historically, someone disposing of their private residence could include the last 36 months of ownership for the purposes of relief, regardless of whether they lived in the property. This was reduced to 18 months in 2014, and from April 2020 will be nine months. If a sale takes longer, sellers could be exposed to a tax liability, need to report the disposal and pay tax within 30 days of sale.
In addition, where a property has been occupied as a private residence and at some time been let, the gain attributable to the rental period is eligible for lettings relief up to a maximum of £40,000. From April 2020, lettings relief is restricted to those living alongside their tenants only.
These changes will likely mean many more people will have to file returns and pay tax on account. Even if someone has an accountant or tax adviser, they may be used to only providing information as part of their annual tax return compliance and be unaware of the new property changes.
Lawyers handling the transactions will be ideally placed to ensure the seller of property is aware of these changes. It may be many lawyers don’t want to get involved in their client’s tax affairs. However, by highlighting the issue in broad terms or that advise should be sought, may mean an unsuspecting seller doesn’t end up with penalties and interest for failing to file the appropriate returns. And this is in turn, is more likely to lead to a satisfied customer.