All change for landlords

Make sure you’re aware of new CGT requirements and finance cost restrictions for residential properties.

Capital gains tax (CGT)

For UK residents, there is another change in payments of CGT for disposals made on or after 6 April 2020. Return and payment of CGT has to be paid within 30 days following the completion day for UK land (including buildings) when there is a charge to CGT. This change may cause a substantial cashflow difficulty for landlords in the short term.

If your client is already within self-assessment and has to complete one, you will need to ensure that the gain is also included on their self-assessment tax return; HMRC will be amending the self-assessment return to allow you to do this.

How to calculate capital gain on disposal of residential property:

The self-assessed calculation of the amount payable on account takes into consideration unused losses brought forward or in the same tax year and the person’s annual exempt amount, whereas any anticipated losses on future disposals cannot be taken into account. The rate of tax for individuals is determined after making a reasonable estimate of the amount of taxable income for the year.

Once the provisional calculation has been submitted and the tax paid, it cannot be reduced (for example, because your client made a capital loss later in the year) until the client submits their self-assessment return. Failing to meet deadlines for submission and payment will trigger penalties.

The provisions are contained in Schedule 2 of Finance Act 2019. Some of the main points are as follows:

  1. These changes to capital gains tax apply to the following (subject to some limited exclusions). Schedule 2 Part 1 1(1) states that the schedule applies to:
  1. ‘Any direct or indirect disposal of UK land which meets the non-residence condition (whether or not a gain accrues) and which is made on or after 6 April 2019, and
  2. Any other direct disposal of UK land on which a residential property gain accrues and which is made on or after 6 April 2020.’

CGT payable on residential property and carried interest is 18% and 28% as opposed to normal capital gain tax rate of 10% and 20% respectively for basic and higher rate taxpayers.

As highlighted within Agent Update March 2020, ‘To enable customers to report and pay any CGT liability arising from gains on the sale of a property HMRC are developing a new digital service accessible from GOV.UK, which will be available from April 2020 to make it easier for customers to report and pay their CGT property disposal liability.’

Finance cost restrictions

Since 6 April 2017, landlords are no longer able to deduct all of their finance costs from their property income to arrive at their property profits. Instead, they receive a basic rate reduction from their income tax liability for their finance costs. Year to 5 April 2020 will be the final year when 25% of finance cost is allowed in full, whereas 75% of the finance cost is used as a tax reducer. From 6 April 2020 no finance cost is deductible when computing property income and losses, and 100% finance cost is used a tax reducer.

Finance costs include mortgage interest, interest on loans to buy furnishings and fees incurred when taking out or repaying mortgages or loans. No relief is available for capital repayments of a mortgage or loan. You may find these examples useful for understanding how do these changes impact on your client’s tax position.

The following won’t be affected by the introduction of the finance cost restriction: 

  • UK resident companies
  • non-UK resident companies
  • landlords of furnished holiday lettings.

 This rate restriction pushes more landlords into the higher rates of tax and make the renting properties business uneconomical.

No further changes to capital allowances

Main change sees an increase of 1% for structures and buildings allowance.

Structures and buildings allowance

As previously announced the annual rate of capital allowances available for qualifying investments on or after 29 October 2018 to construct new, or renovate old, non-residential structures and buildings will increase from 2% to 3%.

The change will take effect from 1 April 2020 for corporation tax and 6 April 2020 for income tax. Businesses whose chargeable period spans 1 April (corporation tax) or 6 April (income tax), may claim 2% per year for days in that period before the operative date and 3% for days thereafter.

Capital allowances for business vehicles

The government previously announced that it is consulting on bringing forward to 2035 the ending of sales of new petrol, diesel and hybrid cars and vans.

To encourage businesses to purchase more environmentally friendly (lower CO2 emission) vehicles, the availability of First Year Allowances (FYAs) has been extended to April 2025 (this was due to come to an end from April 2021).

100% FYAs will continue to apply for business cars acquired from April 2021 with CO2 emissions of 0g/km (pure electric vehicles).

Business cars with CO2 emissions up to 50g/km will be eligible for WDAs at the main rate of 18% while cars with CO2 emissions over 50g/km will be eligible for WDAs at the special rate of 6%.

The new 50g/km threshold will also apply for determining the lease rental restriction of 15% of the costs of hiring business cars.

Rounding up changes to VAT

Digital publications will also become zero-rated, while the agricultural flat rate scheme entry and exit rules are amended.

The VAT registration rates are unchanged, with few announcements. The main business changes concern:

Sanitary products

VAT is currently charged at a reduced rate of 5% on women’s sanitary products as they are treated as luxury products. From 1 January 2021, VAT will be charged at zero rate.

Digital publications

Currently, VAT is charged at the standard rate of 20% on digital publications (e-books, e-newspapers, e-magazines and academic e-journals). From 1 December 2020, VAT will be charged at zero rate, following the same rules as physical books.

The government expects the publishing industry, including e-booksellers, to pass on the benefit of this relief to consumers.

Agricultural flat rate scheme (AFRS)

New entry and exit rules will be implemented from 1 January 2021. Businesses can join the AFRS when their annual turnover for farming-related activities is below £150,000. Once annual turnover for farming-related activities exceeds £230,000, businesses must notify HMRC to be deregistered from the scheme and register for VAT instead.

Businesses with turnover that exceeds £85,000 for non-farming-related activities will still be required to register for VAT and will be ineligible for the scheme.

No delay to IR35 changes

Previous changes to IR35 administration to be implemented without any further modification.

Beyond those announced in the review published on 27 February 2020, there will be no further amendments to IR35.

In essence, any large businesses contracting for provision of services will need to consider whether the Off Payroll Working Rules apply, in which case the large business will be responsible for assessing whether the engagement falls within the intermediaries rules (IR35) and if so, communicating that finding to the service provider and applying the appropriate payroll tax deductions to any payments made.

The new obligations are covered in the IR35 pack, subject only to the minor modifications announced on 27 February. These include:

  • Penalties: HMRC will not enforce penalties for errors relating to the new rules for the first year except in cases of deliberate non-compliance. However, HMRC will collect any taxes due, and the Office of Budget Responsibility has confirmed that the yield estimates for the measures have been maintained at the previously estimated levels in the light of the revised penalties policy.
  • Size of client: The draft legislation has been amended to provide that the worker or any agency can request information from the client about their size, in order to clarify whether an SDS should be expected. If the client is small, the existing obligation on the PSC to operate IR35 will remain in place.
  • Overseas clients: The draft legislation has been amended to confirm that where a client is ‘wholly overseas’ the existing obligation on the PSC to operate IR35 will remain in place.

The updated draft legislation will not be published until 19 March 2020, giving businesses 11 working days to develop and implement information request mechanisms and confirm compliance with the updated overseas clients rules.

Employment allowance to increase by £1,000

Steps in the right direction to take some weight off the shoulders of SMEs.

The Chancellor announced an increase in the Employment Allowance from £3,000 to £4,000 to protect small businesses from the rise in the minimum wage. From next month companies will not have to pay Employer National Insurance Contributions on the first £4,000 of their annual bill.

Changes had already been announced that the Allowance is only available where from 6 April the Class 1 National Insurance bill of the business or charity was below £100,000 in the previous tax year.

You cannot claim the Employment Allowance from April 2020 if:

  • you’re the director and the only employee paid above the secondary threshold
  • you employ someone for personal, household or domestic work (like a nanny or gardener) – unless they’re a care or support worker
  • you’re a public body or business doing more than half your work in the public sector (such as local councils and NHS services) – unless you’re a charity
  • you’re a service company working under ‘IR35 rules’ and your only income is the earnings of the intermediary (such as your personal service company, limited company or partnership)
  • Class 1 National Insurance contributions (NICs) liability are at or above £100,000 in the tax year before the year of claim. This includes connected companies
  • if the business exceeds the de minimis state aid threshold.

From 6 April 2020 the Employment Allowance falls within the state aid definition and those claiming the employment allowance will need to declare they do not exceed the de minimus state aid threshold. This means it will contribute to the total aid you are allowed to get under the relevant de minimis state aid cap in the relevant three year period.

Business rates changes

Business rates to be scrapped for certain businesses…

Business rates will be abolished altogether for smaller firms in retail, leisure and hospitality – a tax cut worth up to £1bn. The scrappage will only apply to premises with a rateable value of up to £51,000 to help cushion the blow from decreased demand until end-2020.

…other small businesses to receive cash grant

Small businesses that pay no business rates will receive a £3,000 cash grant, worth a total of £3bn.

CGT: reduction in Entrepreneurs’ Relief lifetime limit

Significant cut to lifetime limit – but not quite abolition.

Effective immediately (from 11 March 2020) the lifetime limit on gains eligible for Entrepreneurs’ Relief (which offers a reduced 10% rate of CGT on qualifying disposals) will be reduced from £10m to £1 million.

The legislative detail will be introduced in Finance Bill 2020. It has been announced that Finance Bill will also provide that the lifetime limit must take into account the value of Entrepreneurs’ Relief claimed in respect of qualifying gains in the past. Therefore, any entrepreneurs who have already claimed this relief on past business disposals for gains in excess of £1m will no longer have access to this relief.

This is a significant reduction that was anticipated in some form, and comes in response to evidence that it has done little to incentivise entrepreneurial activity and that most of the benefit accrues to a small number of very affluent taxpayers.

The good news is that it has not been completely abolished and will still be available for small to medium sized business disposals, subject to the usual criteria for eligibility.