Year-end tax planning for property owners

8 Feb 2022

Houses

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 – see here for more information.

Top tips

  • An unincorporated property businesses 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 (ie elections for 2021-22 will need to be made by 31 January 2024).
  • 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

As part of the ongoing Making Tax Digital project, quarterly reporting for income tax will be introduced from April 2024 for businesses with annual income of over £10,000. Landlords – particularly smaller landlords who may not currently be using accounting software – may wish to consider the best digital solution for them well in advance of this deadline.

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 CGT purposes. The election must be submitted to 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)

Stamp Duty Land Tax (SDLT) is payable in bands, with different rates applying to residential and non-residential property. Higher rates of SDLT apply to the purchase of additional residential property.

For residential properties in the UK and Northern Ireland purchased between 8 July 2020 and 30 September 2021, the NRB was increased, meaning that the first £500,000 of the purchase price of any residential property was exempt from the charge to SDLT. This change has now ended, with the NRB returning to £125,000.

First time buyers are eligible for SDLT relief when buying properties worth £500,000 or less. If the property is worth less than £300,000, no SDLT is payable, with a lower rate of 5% applying for properties worth between £300,000 and £500,000.

From 1 April 2021, there is also a 2% SDLT surcharge on the purchase of residential property in England and Northern Ireland where the purchaser is non-UK resident. This rate is applied on top of all residential rates of SDLT, which will depend on the circumstances, identity and intentions of the purchaser.

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 (£250,000 for transactions between 15 July 2020 and 31 March 2021). In Wales, the threshold for Land Transaction Tax (LTT) is £180,000 (£250,000 for transactions between 27 July 2020 and 30 June 2021).

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.

Furnished Holiday Lettings

A property that qualifies as an 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 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 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 2021-22, 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 last valuation date was 1 April 2017 (unless the property was acquired after then), and the property’s value at that date determines the tax payable for the years 2018 to 2022.

ATED returns and payments for 2022-23 are due by 30 April 2022. The relevant charges are as follows:

Top tips

  • Where a property is acquired after 1 April 2022, 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.

Looking forward

The ATED legislation requires a revaluation of properties every five years. The next valuation date will be 1 April 2022, with the property’s value at that date determining the tax payable for the years 2023 to 2027. Taxpayers will need to consider revaluing the property before April 2023, when the first return using the new value will 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 January 2022. The FCA does not regulate tax advice.

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