Tax Change Implications for Landlords in 2021 and Beyond

We look at what changes landlords need to be aware of when it comes to CGT and rental income tax and how this'll impact their next tax return.

Rental Accounting

Over the past five years or so, landlords have had a pretty bad time of it, tax-wise. Buy to let mortgage interest was withdrawn as an allowable expense, a ‘higher rate’ purchase tax was introduced and Capital Gains Tax (CGT) rates were dropped by 8% for every asset class apart from residential property.

So we were fully expecting property taxes to be hiked in some way by the Government this year as well. However, the great news is… nothing much happened!

There were two rumours ahead of the autumn budget:

  1. Following the review into CGT by the Office for Tax Simplification, it was feared that the CGT burden for buy to let investments would be increased, and
  2. With the Welsh and Scottish governments already having imposed a 4% higher rate purchase tax for additional properties, there was talk of the rate going up in England and Northern Ireland.

So it was a relief for property investors that neither of those was mentioned by the Chancellor. In fact, the only significant tax change for landlords announced last month was a positive one: the time to report and pay any CGT due from residential property sales has been doubled, from 30 to 60 days, effective now.

That should be a great help to landlords, who were clearly struggling to comply with the 30-day deadline. HMRC data shows that up to a third of CGT returns were being filed late and a total of £1,311,300 of penalties were issued in the last 6 months of 2020 alone.

What else do you need to be aware of for your next tax return?

  1. The 2020/21 tax year is the first return where you can’t deduct any of the mortgage interest paid over the year as a simple expense. However, you can claim relief on it at the basic rate of 20% – meaning any landlords who have been paying tax at the basic rate won’t see any difference in their end tax bill. If you’re a higher-rate taxpayer, it should at least help reduce your taxable income.

It’s also worth checking with a property tax specialist to make sure you’re taking income from your property in the most tax-efficient way, or whether there’s anything you can do to keep your liability in the basic-rate bracket – that’s total earnings up to £50,000.

  1. Your personal allowance (tax-free earnings) for 2020/21 is £12,500.
  2. Private residence relief (PRR) for CGT was halved, from 18 to 9 months, as of April 2020. So, if you once lived in the property that you currently let, you don’t pay CGT for the years you lived there yourself – plus, you get an additional exemption for the last 9 months that you owned the property, even if it was let during that time.
  3. Lettings relief – that’s up to £40,000 that can be claimed against capital gains – now only applies if you share the property with a tenant – i.e. you live there yourself.

Planning ahead, one of the biggest changes to be aware of and plan for is the freezing of certain allowance thresholds between 2022 and 2026, in an effort to ‘claw back’ some of the pandemic spending:

  • The personal allowance for income tax rises to £12,570 for 2021/22, and the basic-rate threshold is raised to £50,270, but that will then not be revised for 5 years.
  • The CGT personal allowance will be frozen at £12,300.
  • The inheritance tax (IHT) threshold will be maintained at £325,000, with an additional £175,000 allowance if you are passing on your own home to children or grandchildren.

And, although the introduction of Making Tax Digital has been delayed until April 2026 due to the IT systems not being ready for the expected number of adopters. However, despite the long timeline, it’s never to soon to start preparing for legislative changes.

From 2026, you will have to keep digital records and use compatible software to report to HMRC quarterly, rather than just making one annual return, so it’s worth looking at financial tracking software from the likes of Landlord Studio to help get you started. It’s really easy to use and if you are going to have to go digital in the future, you might as well scrap the spreadsheets now!

Given how complicated property tax can be, and to make sure you have the most tax-efficient planning in place, it’s highly advisable to consult both a tax specialist and an independent financial adviser. Together, they can make sure you mitigate not only your own tax liability but also the future IHT liability for your children and other beneficiaries.