Thirty Days to Pay Capital Gains Tax – The Latest Tax Attack on Small Landlords from a Government that Prefers Big Business
Thirty Days to Pay Capital Gains Tax
Landlords of residential property should be aware of new tax deadlines for capital gains tax which mean they have just thirty days to pay it.
Starting from April 6th 2020, the deadline by which owners with taxable capital gains on residential property will reduce from up to 22 months to just thirty days from completion date of the sale. (Jan 31, the final day of self-assessment, following the end of the previous tax year was the old deadline, meaning people would have up to 22 months from sale).
Many people will be unaware of the new rules.
(Note that where you manage to exchange contracts before April 6th, but complete after that date, the new 30 day deadline will not apply).
Penalties for missing the deadline will be severe. If you file late, there is an initial £100 penalty. After three months, there are extra penalties of £10 a day up to a maximum of £900. After 6 months, a further penalty of 5 per cent of tax due applies. After 12 months, another 5 per cent penalty applies.
If you pay the tax late, there is a different penalty scheme with fines of 5 per cent of the tax unpaid at 30 days, and again at six months and 12 months.
It all adds up.
Thirty days after completion is a very tight timescale to work to especially as working out the capital gains tax due is actually not easy. There is the cost of the sale (and purchase) to find and deduct, the cost and dates of capital improvements to the property that have been made over the course of ownership, the marginal tax rates to consider, the split of ownership (where a property is joint owned) as well as the sale of other assets that may apply in that tax year.
Capital gains tax is charged at 18 per cent for basic rate taxpayers and 28 per cent for additional or higher rate taxpayers – this is a special high rate reserved just for landlords. (More on this below).
The new deadlines and rates will not apply to investors who own residential property through a limited company – in these cases it is corporation tax, not capital gains tax that applies.
The Latest Tax Attack on Small Landlords
It is all very heavy indeed and seems yet another part of the government’s big tax hikes on the smaller buy to let landlords who have tended not to be in corporate structures. And it is one of a number of measures that seem designed to skew the playing field heavily towards big corporate owned “build to let” companies and non-landlord home buyers.
The new deadline comes in at the same time as the phasing out of another very valuable relief used by many buy to let landlords – this being the effective removal (in most cases) of Lettings Relief, which gave landlords who had let a property they had previously lived in, a relief worth up to £40,000 from capital gains tax (or £80,000 for a married couple), when they came to sell. (This is now only available to those very few landlords who were sharing their property with a tenant).
Is this the end of the various tax assaults on landlords that have combined with more regulation to put off many new amateur landlords?
It is hard to know. But I fear not.
The Tax Attacks History from a Government that Prefers Big Business
It is worth summarizing the many ways that the government has massively ramped up taxes on private landlords in recent years.
1 The removal of the wear and tear allowance. Previously landlords letting furnished property could deduct 10 per cent from net rents each year. (I actually don’t consider this one had a particularly large impact).
2. The gradual removal of a landlord’s ability to deduct loan and other financing costs directly from rents, before declaring their profits. This has gradually been phased in over four years starting in 2017/18. From the tax year 2020/21 it will be fully phased in. This one a real biggie and has already pushed landlords who were previously comfortable basic rate taxpayers into the higher rates of tax. Instead of the tax break, landlords will get an effective “tax credit” equal to 20 per cent (the current basic rate of tax) of their finance costs added back in, after their tax has been calculated.
3. A special high rate of capital gains tax. Every individual in the UK who has a capital gain from anything other than buy to let will generally pay tax at 10 per cent (if a basic rate taxpayer) or at 20 per cent (if a higher rate taxpayer). Not non-incorporated buy to let landlords!
They “enjoy” the “special status” of being singled out as the only group in the UK who have to pay 18 per cent (basic rate taxpayers) or 28 per cent (for higher rate taxpayers) – a full 10 per cent more than everyone else on each eligible pound of capital gain.
4. Taper Relief and Indexation Relief have long been abandoned. Both meant there was some allowance for the effects of inflation, but their removal means gains which simply reflect the general prevailing rate of inflation are taxed in full, with no allowance for the eroding effect of inflation.
5. An extra levy of 3 per cent to be paid on the purchase price of each property a landlord buys to let. (This is in addition to huge increases in the normal residential SDLT rates in recent years, which has meant property is now taxed far more heavily than say, share purchases).
6. The effective abolition of Lettings Relief, as noted above, which was worth up to £40,000 – and which could be used to cover any period that a property was your main residence at any time, plus, for each property, the last 3 years of ownership.
It is quite a long list.
But I fear it is not over yet.
Tax Attacks on Small Landlords – What’s Next?
I expect that the government may eventually move to eliminate the tax credit on loan interest and other financing costs too – so there will be no tax break at all for interest on loans to buy to let.
Also, I imagine the government may have become rather irritated at the way so many savvy landlords are now buying properties through company structures, in which the biggies – items 2, 3 and 4 in the list above – can be avoided (though other, usually less impactful taxes will apply).
As such, it would not surprise me if, the government moves to make small incorporated landlords’ currently more attractive tax set-ups, a lot less attractive in future, in order to ensure a “tax advantage” to the big build to let corporate landlords like Legal & General, Unite, Grainger and many big foreign property players.
This is because the government does not “get” small businesses. And it would far rather individuals did not opt for direct property investment at all, but rather sank their money in collective funds and annuities run by the government’s friends in the city, so that City fee incomes can be maintained.
Plus, they would rather that all rented properties in the UK were owned and run by big companies too – many of these will be the same big city companies who run the collective unit and pension fund investments. As noted above, many have now moved in on build to rent already. (Not that their performance has been all that great – see this article and the linked articles from it, in “The Times and FT”).
Pesky individuals who wish to look after their own interests and take control of and manage their own futures as landlords of properties are just not welcome. That, I believe, is the Conservative view.
The Labour position? Well, they just haven’t got a clue and keep banging on about rent controls – which have never worked anywhere in the world or the UK at any time. But I have said more on that in other posts.
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