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.
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 Buy to let mortgage interest was withdrawn as an allowable expense, a ‘higher rate’ purchase tax was introduced and Capital Gains Tax (CGT) rates were dropped by 8% for every asset class apart from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!
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.
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.
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:
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.