Year-end tax planning for property owners

17 Feb 2023

Annual Tax on Enveloped Dwellings (ATED)

We outline what property owners can do before the end of the UK tax year to make the most of the available allowances and reliefs open to them.

Letting property

Profits from a rental business are subject to income tax at your marginal rate of tax.

Expenses incurred wholly and exclusively in connection with the rental business are deductible when calculating net taxable profits, provided they are not capital in nature. There is a restriction on deductions for finance costs relating to residential lettings.

Capital expenditure is usually deductible against any capital gain on an eventual disposal of the property. The rules for determining whether an expense is capital or revenue in nature for tax purposes are not always straightforward, particularly in relation to expenditure incurred on repairs and maintenance.

Capital allowances are available on qualifying expenditure on commercial property, but are not generally available in respect of residential property. Instead, the actual cost of renewing furnishings can be taken as a deduction.

The Rent a Room Scheme provides tax relief of £7,500 per year where an individual rents out a room in their only or main residence. There is also a £1,000 property allowance, allowing individuals to receive small amounts of rental income tax-free. It is not possible to claim both reliefs on the same source of income in a single tax year.

Special rules apply to non-resident landlords renting UK property – read our article to find out more.

Top tips

  • An unincorporated property business with a turnover of up to £150,000 now defaults to calculating taxable profits on the cash basis. Anyone wishing to continue to use the accruals basis will have to elect annually to do so. If you wish to elect out of the cash basis, you have until one year after the relevant self-assessment filing date to make the election (eg elections for 2022-23 will need to be made by 31 January 2025).
  • Ensure that any losses are claimed, so that they can be carried forward and offset against future profits from the same rental business.
  • If you let a furnished room in your home to a lodger and your gross rental income exceeds £7,500 for the year, calculate whether it is more tax efficient for the excess to be charged to tax, or for you to pay tax on your rental profits after deduction of expenses in the usual way. You can elect for whichever method produces the lowest tax liability.

Looking forward

At the end of 2022, the government announced that the planned introduction of quarterly reporting for income tax, which had been expected from April 2024, will be deferred to 2026 at the earliest. Many landlords will be affected by the reforms when they are introduced, but this latest deferral has given more opportunity to prepare.

Private Residence Relief

Private Residence Relief (PRR) reduces the gain on the sale of your main home, usually to nil, thus avoiding a charge to CGT. The relief applies for the time that the property is occupied as your main home. The whole of the property should qualify, including land up to half a hectare, or potentially more if it is appropriate for ’the reasonable enjoyment’ of the property.

If you own more than one home, whether solely or jointly with your spouse or civil partner, you may be able to make a PRR election stating which property is your main home for capital gains tax (CGT) purposes. The election must be submitted to HM Revenue & Customs (HMRC) within two years of another property being available for occupation as a residence.

If a property qualifies for PRR relief, any period during which it was let will also qualify for a ‘letting exemption’, up to a maximum of £40,000. Lettings relief is only available where a landlord lives in shared occupation with their tenant.

The last nine months of ownership qualifies as a period of deemed owner occupation. A higher 36-month period applies for disabled people or individuals moving into a care home for more than three months, and for their spouses or civil partners. Other periods of absence may also qualify for treatment as periods of deemed owner occupation.

A second home overseas can only be nominated as a main residence for the purposes of PRR for any given year where the individual is either resident in the same jurisdiction as the property or where they meet a ‘day count’ test. This latter requires them (or their spouse/civil partner) to spend at least 90 days in the property, or in another property which they own in the same territory.

Top tips

  • Ensure that any claim for PRR will stand up to scrutiny, particularly if you have owned or occupied the property for a relatively short period of time.
  • Couples should consider jointly owning property for which no PRR election can be made, to benefit from two annual exemptions and/or lower rates of CGT when the property is sold.
  • If you have let out a property where you have lived in shared occupation with your tenant, ensure that a claim for lettings relief is made.
  • If a property has been sold by trustees and it was occupied by a beneficiary as their home, check whether PRR relief is available.

Stamp Duty Land Tax (SDLT)

SDLT is payable in bands, with different rates applying to residential and non-residential property in England and Northern Ireland.

The Higher Rates for Additional Dwellings (HRAD) is a 3% surcharge which applies to each band of charge levied on the purchase of residential property by individuals who already own residential property anywhere in the world, and to all purchases of UK residential property by companies and discretionary trusts. There are a limited number of exemptions from the charge. It may also be possible for an individual to reclaim the HRAD surcharge if the new property purchased qualifies as a ‘replacement main home’. The repayment claim must be made within 12 months from the date of disposal of the original main home.

With effect from 23 September 2022 until 31 March 2025, there have been some increases in SDLT bands and limits for residential property:

  • The SDLT nil rate band has been increased from £125,000 to £250,000.
  • The nil rate band for first-time buyers has been increased from £300,000 to £425,000.
  • The cost limit for property qualifying for First Time Buyer’s Relief has been increased from £500,000 to £625,000 (though the standard rates will apply to properties costing more than £625,000).

There is an additional 2% SDLT surcharge applied to the purchase of residential property in England and Northern Ireland where the purchaser is non-UK resident for SDLT purposes. This rate is applied in addition to each SDLT residential rate of charge, and the exact tax charge will depend on the circumstances, identity and intentions of the purchaser. If an individual purchaser or purchasers become UK resident after the purchase of the property, they may be able to reclaim this surcharge within two years of the effective date of the transaction (usually the completion date).

Companies acquiring residential property that costs more than £500,000 are subject to a penalty rate of 15% on the entire purchase price unless they qualify for an exemption. Where the company is not UK-resident for SDLT purposes, the 2% surcharge also applies and the SDLT rate may therefore be 17% on the entire purchase price. Exemptions from the penalty rate apply where property is purchased for a qualifying business purpose, including for use in a property rental business or for purchase and resale as part of a business. Where a relief applies, the SDLT charge is a calculated in the standard manner, eg increasing rates charged on increasing bands of consideration, and the HRAD surcharge is added to every tax rate. This relief can be lost where, within three years of the date of purchase, the property is occupied by a ‘non-qualifying person’, which is very widely defined and broadly is a shareholder and any of their relatives.

In the devolved regions of the UK, different taxes are payable on land transactions. In Scotland, Land and Buildings Transaction Tax (LBTT) is payable on transactions over £145,000. In Wales, the starting threshold for paying main residential rates of Land Transaction Tax (LTT) increased from £180,000 to £225,000 from 10 October 2022. Like SDLT, higher rates of LBTT and LTT apply to the purchase of additional residential property by individuals and purchases of any residential property by companies and discretionary trusts. Scottish LBTT in particular differs significantly from SDLT and that gap is widening every year.

Top tips

  • Be aware of the different regimes for land transfer tax across the different regions of the UK.
  • The definition of ‘non-resident’ for the purposes of the SDLT surcharge is different to the existing definitions of residence for individuals and companies for other tax purposes. It is possible for purchasers to have a different tax status depending on the tax in question. Buyers need to be sure of their residence status, for SDLT purposes, if purchasing residential property in the UK.
  • In Scotland, the additional rate of LBTT charged where individuals buy a second residential property, or where residential property is bought by a non-natural person such as a company or trust, increased from 4% to 6% with effect from 16 December 2022.
  • SDLT returns can only be amended within 12 months of the date of submission.
  • In general, it is always a good idea when purchasing property to have the SDLT treatment reviewed in advance, to ensure that reliefs or exemptions are not missed. Late claims for reliefs or exemptions are only available in limited circumstances.

Looking forward

There are currently SDLT reliefs available when more than one dwelling is purchased in a single transaction (or a number of linked transactions), and when a property has both residential and non-residential use. However, these reliefs are increasingly coming under HMRC scrutiny, and so it may be that these reliefs are curtailed or abolished in the future.

Furnished Holiday Lettings

A property that qualifies as a Furnished Holiday Letting (FHL) can benefit from various tax reliefs not generally available to property rental businesses. Capital allowances can be claimed for expenditure on furniture, fittings and equipment, including immediate relief on qualifying expenditure of up to £1 million under the AIA. For CGT purposes, the disposal of an FHL is treated as the disposal of a business asset and can be ‘rolled over’ against the acquisition of replacement assets, or benefit from Business Asset Disposal Relief (BADR).

Allowable expenses can be offset against the rental income in calculating the net taxable profits, as for a normal rental business.

Losses must be claimed and can only be carried forward against FHL profits in future years. UK FHLs are treated as separate businesses from FHLs in European Economic Area (EEA) countries.

To qualify as an FHL, the property must be furnished, located in the UK or another EEA country, and let on a commercial basis with a view to realising profits. It must also satisfy the following tests:

Availability test

The property must be available for letting to the public (not family or friends) for at least 210 days per tax year.

Letting test

The property must actually be let to the public for 105 days or more per tax year, excluding periods of continuous occupation by the same person for more than 31 days.

Pattern of occupation test

The property must not normally be let for periods of long-term occupation totalling more than 155 days per tax year. A period of long-term occupation is one where the property is let to the same person for more than 31 days.

Top tips

  • If your FHL property was not let for the requisite 105 days in 2022-23, but satisfies the other conditions, you may still be able to secure the tax reliefs available by electing for a ‘grace period’ to apply.
  • Consider making an averaging election where you have more than one qualifying property and one property does not meet the occupancy test of 105 days on its own. Where the average occupancy of all the FHL properties is above 105 days, all properties will qualify.
  • Check whether any capital expenditure qualifies for the AIA.
  • If you are considering buying an FHL property containing fixtures, it may be appropriate to make a joint election with the vendor to agree the value attributable to the fixtures, so that capital allowances can be claimed going forward.

Annual Tax on Enveloped Dwellings

The Annual Tax on Enveloped Dwellings (ATED) is a tax on residential property worth more than £500,000 and owned by a ‘non-natural’ person. This is defined as a company, a partnership that has a corporate partner or member, or a collective investment scheme. It does not include trusts. Valuable reliefs from the ATED regime can be claimed in certain circumstances, including for property development, rentals to unconnected persons, and trading businesses.

ATED uses a periodic revaluation system to determine the level of charge. The most recent valuation date is 1 April 2022, which will be the value of the property for the 2023-24 ATED year and the four years following. ATED taxpayers who do not expect to qualify for 100% relief should obtain a new valuation as at 1 April 2022. While there is no requirement for a formal valuation to be undertaken, we would recommend that the valuation is obtained from a reputable surveyor so that it could stand up to scrutiny in the event of an HMRC enquiry.

The ATED return and payment date for the 2023-24 period is 30 April 2023. The relevant charges are as follows:

Year-end-tax planning for property owners

Top tips

  • If the new 1 April 2022 valuation falls within 10% of one of the ATED thresholds (for example, if your property is valued at £1.9 million, which is within 10% of the £2 million threshold), then you may wish to consider applying to HMRC for a pre-return banding check (PRBC) in advance of submitting your 2023-24 ATED return. A PRBC allows HMRC to agree, disagree or ask for further information to confirm that your dwelling is banded correctly before your return is submitted. HMRC will typically respond to a PRBC application within 30 working days, though this can take longer, so we would recommend that this process is started as early as possible if this will be relevant to you.
  • Where a property is acquired after 1 April 2023, the ATED return and payment is due within 30 days of acquisition, rather than 30 April.
  • Reliefs from ATED must be claimed. Penalties will be charged for late filing of the return, even if there is no ATED liability.
  • Be aware that a change of use of a property may mean amended ATED returns need to be filed.

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This article is published on a general basis for information only and no liability is accepted for errors of fact or opinion it may contain. Professional advice should always be obtained before applying the information to particular circumstances. Tax law is subject to change. This publication represents our understanding of the law and HM Revenue & Customs’ practice as at 1 February 2023. The FCA does not regulate tax advice.

Contact Us

Robert Langston
Partner, London

Key experience

Robert is the firm’s National Tax Partner and specialises in advising individuals and companies on cross border tax issues.