Property allowance
The property allowance was introduced in 2017/18. It operates in a similar way to rent-a-room relief, but instead of exempting £7,500 of gross property income from tax, the property allowance exemption is just £1,000 per tax year.
If gross property income exceeds £1,000, then the taxpayer has the choice of paying tax on the excess or using the basic property regime. Unlike rent-a-room relief, the £1,000 is not halved for joint ownership.
There are several restrictions on the use of the property allowance. For example, it cannot be claimed for:
1. Income that would otherwise qualify for rent-a-room relief if the individual had not chosen to be taxed on the standard basis;
2. Distributions from a property authorised investment fund (PAIF); and
3. Property income distributions (PIDs) from a real estate investment trust (REIT).
In terms of capital taxes and property, two need to be considered…
Capital gains tax
Since 2016/17 there has been an 8% surcharge on the rate applied to residential property gains, making the rates for 2019/20 18% (below UK higher rate) and 28% (UK higher and additional rate).
Currently, CGT is generally payable on 31 January in the tax year of assessment following disposal (31 January 2021 for a sale in 2019/20).
However, from 2020/21, CGT on UK residential property disposals by UK residents will be due within 30 days of the completion of the sale, along with a tax return for the sale. This could prompt an increased flow of BTL properties onto the market later this year.
The 2018 Budget contained two proposals for changes to private residence relief (PRR) which could have an indirect effect on residential landlords. Both are currently out for consultation until 1 June, with implementation scheduled for 2020/21.
The more significant change is that to the final exemption period – in effect the period during which it is possible to benefit from PRR on two properties. The proposal is to reduce this from 18 months to nine months, subject to special rules for those with a disability or in care.
The second planned change is to limit lettings relief, which currently exempts up to £40,000 of gains, to only those instances in which the property owner shares occupancy with the tenant (which rarely happens!).
Inheritance tax
Inheritance tax (IHT) generally applies to residential property investments. Even for furnished holiday lets, which are regarded as business for some tax purposes, a claim for IHT business property relief will usually fail.
The residence nil rate band (RNRB) can be of help in limited circumstances, as the legislation only requires that the ‘qualifying residential interest’ was at some time – not just at death – occupied as a home.
In 2019/20 the RNRB is £150,000 (plus up to another £150,000 ‘transferable RNRB’), subject to £1 for £2 tapering on estates above £2 million (before any reliefs and exemptions).
In practice the future of the RNRB is now uncertain as it is clearly in the sights of the Office of Tax Simplification, which is due to issue the second part of its IHT simplification review soon.
The opportunity
All of this underlines the opportunities for advisers with clients in the BTL or related markets.
The ‘amateur’ landlord is disappearing, caught in a pincer movement of greater taxation and government regulation on one side and, on the other, a more professional, volume-based approach as institutional investors enter the market with build-to-rent properties.
Landlords who decide to retreat from the market will not only want advice on tax – particularly mitigating CGT on disposals – but also guidance on where to reinvest the substantial sums they realise to provide income.
And many will be looking to take action in the near term, with an eye on the potential tax changes due in 2020/21, and revived talk about enhancing security of tenure.
The well-informed adviser can provide a one-stop shop to deliver the transformation from property-focussed investor to diversified portfolio owner, upon which they can receive adviser income.
