Property Taxation Guide

Property taxation has been undergoing significant changes recently and a number of other property related reforms have been announced. As most of us will be affected by one form or other of property taxation, this article looks at where we are now and what changes are on the horizon.

1. Stamp duty

Where an individual, trust, partnership or company purchases a residential property, they will only start to pay stamp duty land tax (SDLT), in England and Northern Ireland, on the amount that they pay for the property above £125,000, as set out in the following table:

§ For first-time buyers of property up to £500,000 there is no SDLT on the first £300,000. * 15% for purchases over £500,000 by certain companies/non-natural persons. Please see here.

All rates increased by 3% for purchase of additional residential property (e.g. buy-to-lets, holiday homes, etc.) if value is £40,000 or more.

All rates also increased by 2% for non-UK residents purchasing residential property in England and Northern Ireland if value is £40,000 or more. Please see here.

First-time buyers’ relief (FTBR) applies to purchases of dwellings for £500,000 or less, provided the purchaser has never owned a property and intends to occupy the property as their only or main residence.

First-time buyers purchasing their first home for £300,000 or less will pay no SDLT. Where the purchase price is over £300,000 but does not exceed £500,000, they will pay 5% on the amount above £300,000. (More information about FTBR can be found here).

FTBR applies to purchases in England and Northern Ireland. The devolved administrations in Scotland and Wales set their own rates of tax on Land and Buildings Transaction Tax (LBTT) and Land Transaction Tax (LTT) respectively:

• Scotland - In Scotland, LBTT replaced SDLT in April 2015. More details on Scotland’s LBTT, including rates, bands and online calculators, can be found here. The Scottish parliament introduced a similar reduction to FTBR for first-time buyers, ‘Land and Buildings Transaction Tax First-Time Buyer Relief’ from 30 June 2018. More details on LBTT (First-Time Buyer Relief) can be found here;

• Wales – FTBR only applied up until LTT replaced SDLT for transactions in Wales from 1 April 2018. More details on LTT, including tax rates and tax bands, can be found here. There is no relief from LTT for first-time buyers in Wales.

Surcharge on the purchase of additional residential properties

As with SDLT in England and Northern Ireland, there is a surcharge on the purchase of additional residential properties, such as buy-to-let properties and second homes, of £40,000 or more, at 3% in Wales, and at 4% in Scotland (the Additional Dwelling Supplement (ADS)).

In November 2021, the Government published a consultation seeking views around possible changes to the way SDLT is calculated for mixed-property purchases in England and Northern Ireland which consist of both residential and non-residential property and options to reform Multiple Dwellings Relief (MDR), which is available on the purchases of two or more dwellings, to reduce the increasing number of incorrect MDR claims. At the moment, if anyone buys a property of a ground floor shop with a flat above, they only pay commercial rates of SDLT. HMRC is proposing that the cost should be apportioned so only the shop benefits from commercial rates, with the flat suffering the higher residential rates. This consultation ended in February 2022, and we await the outcome.

The Scottish Government has been seeking evidence and views on the operation of the LBTT ADS.

And the Welsh Government has proposed increasing LTT rates for some transactions including for second homes and short-term holiday let property to reflect localised challenges in housing supply or high second home ownership.

Moving a buy-to-let property into a limited company

Where existing buy-to-let investors move their properties into a limited company, something a number of buy-to-let investors have been keen to do in order to benefit from the more favourable tax regime that applies to companies that own property investments, in England and Northern Ireland, such a transaction is very likely to give rise to SDLT at the normal rates plus the surcharge of 3% if the value of the property exceeds £40,000.

In addition, the capital gains tax (CGT) implications of such a transfer would also need to be carefully considered. Here, if the property ownership was previously run as a “business” and accepted as such by HMRC, incorporation relief may be available to defer CGT.

The increase in the corporation tax rate to 25% from 1 April 2023 for companies with profits in excess of £250,000 will also be a consideration. For companies who have profits of less than £50,000, the current tax rate of 19% will continue to apply with a marginal rate (of 26.5%) on profits of between £50,000 and £250,000 to bring the overall tax rate up to somewhere between 19% and 25%. Companies which are close investment companies – typically family investment companies – will not benefit from the £50,000 small profits rate. The good news here is that, in general, property holding companies that let property to persons who are unconnected with the company will not be treated as close investment companies and so will be entitled to the £50,000 small profits corporation rate in appropriate cases.

The increase in corporation tax will also have an impact on capital gains realised by a company. This will be particularly relevant in cases where the capital gain that arises on the sale of a property is substantial and takes the company into the 25% rate. This tax rate is only 3% below the 28% top rate of CGT currently payable by individuals on disposals of residential property, and, as there would also be further tax for the individual when extracting cash from the company, the corporate environment would not look as attractive from a CGT standpoint.

Also, the position regarding any mortgage on the property will require consideration.

All of these factors need to be considered before deciding whether to move/hold a buy-to-let portfolio in a company or in individual ownership.

Statistics

HMRC recently issued the latest property statistics which provide UK residential and non-residential transaction estimates during the previous 12 months. The provisional seasonally adjusted estimate of UK residential transactions was 114,650 for March 2022, 35.7% lower than March 2021 and 2.6% higher than February 2022. However, HMRC points out that temporary increases to nil rate bands for residential property taxes and the coronavirus (COVID-19) pandemic, have all produced significant uncertainties underlying seasonal trends since around April 2020, and it suggests that these seasonally adjusted statistics should be treated with additional caution.

2. Review of CGT

On 11 November 2020, the Office for Tax Simplification (OTS) published the first of two reports on CGT. This followed a letter from the Chancellor, Rishi Sunak, requesting it ‘undertake a review of Capital Gains Tax’. The first report covered the policy design and principles underpinning the tax, and included recommendations such as taxing capital gains at the same rates as income and reducing the annual exempt amount. The second report, published on 20 May 2021, examined options for ‘simplifying practical, technical and administrative issues’.

On 30 November 2021, the Treasury issued the Government’s formal final response to the OTS reports. It did not accept any of the tax changes suggested by the OTS in its first report. It did, however, accept five of the 14 OTS recommendations in the second report. Many of these recommendations are relevant to property taxation:

1. HMRC should integrate the different ways of reporting and paying CGT into the Single Customer Account (SCA), making it a central hub for reporting and storing CGT data. The Government will consider this recommendation as part of the delivery of the SCA.

2. The Government should consider extending the reporting and payment deadline for the UK Property return to 60 days. As a result, the time limit for making a CGT return and associated payments on account when disposing of UK land and property was extended from 30 to 60 days for disposals that complete on or after 27 October 2021.

3. The Government should extend the ‘no gain no loss’ window on separation to the later of: i) the end of the tax year at least two years after the separation event; or (ii) any reasonable time set for the transfer of assets in accordance with a financial agreement approved by a court or equivalent processes in Scotland. The Government said it will consult on the detail over the course of the next year.

4. The Government should expand the specific Rollover Relief rules which apply where land and buildings are acquired under Compulsory Purchase Orders (CPO). Although owners of ‘let’ land are not normally eligible to claim rollover relief on its sale, special rules allow for such a claim where the let land has been compulsorily purchased. However, the OTS said that restrictions around such claims present particular challenges for owners of farming land. It asked for an expansion of the specific rollover relief rules in such circumstances so that, for example, an agricultural land gain can be rolled over into new agricultural buildings rather than solely more land. The Government said it will consult on the detail in due course.

5. HMRC should improve their guidance in specific areas, including: the UK Property Tax Return; lodgers and people working from home; when Business Asset Disposal Relief could apply to farmers or others looking to retire over a period of time; land assembly arrangements; and flat management companies. The Government said it has already completed a review and expansion of the guidance on the UK Property Tax Return and will proceed to the other areas of guidance listed in due course.

3. Second homes and council tax

The Levelling-up and Regeneration Bill, published 11 May 2022, includes powers for local authorities in England to double council tax on unused and second homes.

Currently, section 11B of the Local Government Finance Act 1992 provides for local authorities to apply an extra council tax charge on properties defined as a long-term empty dwelling. Subsection (8) defines long-term empty dwellings as properties which are empty and substantially unfurnished for more than two years. Section 11B(1C) provides that, from 1 April 2021, the maximum additional charges which may be applied are 100% of the standard council tax bill for long-term empty dwellings which have remained empty for less than five years, up to 200% after five years and up to 300% after ten years. Local authorities have the discretion on whether to apply a premium and at what level to apply the charge below these maximums.

The new Bill changes the definition of “long-term empty dwelling” to reduce the minimum period for which a property must be empty in order to fall within the definition from two years to one, allowing local authorities to charge the 100% premium a year earlier. The amended definition of “long-term empty dwelling” will have effect for financial years beginning on or after 1 April 2024. It does not matter whether the amended period of one year begins before the Bill comes into force.

The Bill also provides billing authorities in England with the discretion to increase the council tax payable on a dwelling where there is no resident, and which is substantially furnished (often referred to as a “second home”). Billing authorities would be able to charge up to 100% extra of the standard council tax bill that would be payable if the property were occupied by two adults and no discounts were applicable.

Ahead of this, on 1 March 2022, the Welsh Government announced that it would take forward proposals to increase the maximum level at which local authorities in Wales can set council tax premiums on second homes and long-term empty properties to 300%, effective from April 2023.

The intention is that Welsh councils will be able to decide the level which is appropriate for their individual local circumstances. Councils will be able to set the premium at any level up to the maximum, and they will be able to apply different premiums to second homes and long-term empty dwellings.

Premiums are currently set at a maximum level of 100% and were paid on more than 23,000 properties in Wales last year. Local authorities opting to apply premiums have access to additional funding, and the Welsh Government has encouraged councils to use these resources to improve the supply of affordable housing.

The SNP’s 2021 Manifesto said that it will give local authorities in Scotland the powers to manage the number of second homes in their area.

4. Second homes and business rates / non-domestic rates

Under current rules, owners of second homes in England can avoid paying council tax and access small business rates relief by simply declaring an intention to let the property out to holidaymakers. However, concerns have been raised that many never actually let the property and leave it empty and, so, are unfairly benefiting from the tax break.

There are around 65,000 holiday lets in England. Many of these properties are likely to qualify for small business rate relief, which provides 100% relief from business rates – meaning no tax is due – on properties with a rateable value of £12,000 or less, provided the business uses only one property (though relief may still be available under certain circumstances). For properties with a rateable value of £12,001 to £15,000, the rate of relief decreases gradually from 100% to 0%.

Following consultation published back in November 2018, the Government confirmed, in January 2022, that, from April 2023, second homeowners will have to prove holiday lets are being rented out for a minimum of 70 days a year and are available to be rented out for 140 days a year to benefit from small business rates relief. Property owners will also have to provide evidence such as the website or brochure used to advertise the property, letting details and receipts.

In Wales, the criteria for self-catering accommodation being liable for business rates instead of council tax will also change from April 2023. Currently, properties that are available to let for at least 140 days, and that are actually let for at least 70 days, will pay rates rather than council tax. The change will increase these thresholds to being available to let for at least 252 days and actually let for at least 182 days in any 12-month period.

In Scotland, from 1 April 2022, self-catering premises also need to be actually let for 70 days in a financial year. Owners or occupiers have previously only been required to make the premises ‘available to let’, or to intend to make them so available, for 140 days or more a year, for the premises to be classed as self-catering holiday accommodation property (and liable for non-domestic rates). Although the gross liability is generally higher for non-domestic rates than it is for council tax, the majority of self-catering premises registered as non-domestic receive 100% Small Business Bonus Scheme relief.

5. Shorter CGT payment window for residential property gains

The disposal of most residential property will be exempt from CGT as a result of the principal private residence exemption. However, where the property is an investment property or has not been occupied solely as a principal private residence throughout the whole period of ownership, e.g. a buy-to-let property, taxable capital gains can arise.

For disposals of UK residential property made on or after 6 April 2020, by a UK resident, a payment on account of any CGT due must be made, and a standalone online return must be sent to HMRC:

• within 30 days of disposing of the property, if the completion date was between 6 April 2020 and 26 October 2021;

• within 60 days of disposing of the property, if the completion date was on or after 27 October 2021.

There is no need to report any disposal where there is no CGT liability (although it is possible to report on a voluntary basis). So, if the gain is fully covered by the private residence exemption, annual exemption (currently £12,300), brought forward or current losses, or where a CGT relief applies which reduces the gain to nil, there will be no liability.

The return has to be done online, requiring taxpayers to have a Government Gateway account to either submit the return themselves or to digitally authorise a tax agent to do it for them.

The self-assessment calculation of the amount payable on account will take the individual’s annual exemption and any losses into account. And the rate of CGT payable will be determined after making a reasonable estimate of the amount of taxable income for the year.

The disposal will also need to be reported in the self-assessment return that must be submitted, at the latest, by 31 January in the year following the tax year in which the gain arose, so, 31 January 2024 for a disposal made in the tax year 2022/23. The precise CGT position for the tax year can then be calculated.

Non-UK residents (including UK residents that make disposals in the overseas part of a split tax year), must report all disposals of UK property to HMRC, even if there is no tax to pay or they have made a loss. This includes any disposal of residential or non-residential UK land and indirect disposals of UK property. The return was already due within 30 days of the disposal being completed, and this deadline has also been extended to within 60 days of disposing of the property, if the completion date was on or after 27 October 2021.

HMRC has published guidance in the CGT manual – Appendix 18 - for individuals, trustees, personal representatives, and agents who use HMRC’s online service to report and pay CGT on UK property gains, which is likely to be valuable to anyone who is caught by these rules.

Note that where contracts were exchanged under an unconditional contract in the tax year 2019/20 (6 April 2019 to 5 April 2020) but completion took place on or after 6 April 2020 the 30/60 days filing requirement does not apply.

One way in which, in the past, it has been possible to defer the date of payment of CGT has been to use CGT deferment relief by making an investment in an Enterprise Investment Scheme (EIS). However, as a result of the 30-day/60-day payment rule, in the cases of the payment of CGT arising on the disposal of residential property it may be necessary to pay the CGT and then recover it if a later EIS investment is made and CGT deferment relief is claimed.

6. Review of how the taxation of property income could be simplified

In March 2022, the OTS published a call for evidence, which invites detailed comments on the technical and practical operation of the tax system in relation to property income. It has also published an online survey and it will be meeting with as many interested parties as it can to hear views directly during the full consultation period. As a result of this review, the OTS says it will develop recommendations for simplification and ways of addressing distortions.

Income from residential property owned by individual landlords is taxed under one of two different regimes:

1. The general position is that income tax will be due on the profits from renting out the property, after certain allowable deductions. However, residential property mortgage interest relief is restricted to the basic rate of income tax, and there are no specific capital gains reliefs.

2. The Furnished Holiday Lettings (FHLs) regime applies to residential property let on short-term lets within certain parameters. The income then attracts some additional reliefs as, for example, mortgage interest is fully deductible and capital allowances are available. In addition, Business Asset Disposal Relief is available on gains made when properties are sold.

Separately, the Rent a Room Scheme provides a tax exemption of up to £7,500 for individuals renting out furnished accommodation within their home. For income of up to £150,000 the taxable amount can be calculated based on either cash received and paid in the tax year (the ‘cash basis’) or the income and expenses relating to the tax year (the ‘accruals basis’ or traditional accounting). If the income is over £150,000 the traditional method of accounting must be used. In calculating the amount of taxable income, a property allowance of £1,000 can be claimed instead of expenses in most cases. Companies are subject to corporation tax on their profits from renting property and are not subject to specific restrictions on the mortgage interest they can deduct.

The OTS review, will look at the current regimes for the taxation of residential property held by individuals, partnerships and micro companies. It asks a number of questions, including: whether any difficulties arise as a result of differences in the tax treatment of property income and trading income or income from other investments, such as OEICs, or quoted shares; what prompts landlords to incorporate their property rental businesses; the benefits and drawbacks of having a different regime for taxing property income and capital gains from FHLs; any difficulties encountered in understanding the rules about, or the tax processes involved in, becoming or being a landlord, including HMRC’s information and registration requirements; and any particular issues of concern to non-resident landlords or their tenants (including in relation to the Non-Residents Landlord Scheme).

Making Tax Digital for Income Tax starts in April 2024 and mandates quarterly electronic updates for most individuals with turnover of over £10,000 for their property (and business) income. The OTS review also asks about awareness of these reporting obligations.

7. ISAs

Help to Buy ISA

The Help to Buy ISA scheme closed to new accounts on 30 November 2019. Help to Buy ISA account holders can, however, continue saving into their account until 30 November 2029 when accounts will close to additional contributions.

Savers can receive a tax-free Government bonus equal to 25% of the amount saved (including interest) when funds are paid on completion of the purchase of a first home costing up to £250,000 (£450,000 in London). The Government bonus must be claimed by 1 December 2030.

The Government contribution is capped at an overall maximum of £3,000 (i.e. on £12,000 of savings) and subject to a £400 de minimis amount, meaning that savers must have saved a minimum amount of £1,600 to receive any bonus.

According to the latest Government statistics, 480,494 property completions have been supported by the scheme, and 630,264 bonuses have been paid through the scheme (totalling £714 million) with an average bonus value of £1,132.

Lifetime ISA

First-time buyers (and others saving for the long-term) can also save through the Lifetime ISA (LISA), which enables those between the ages of 18 and 40 to save up to £4,000 in each tax year with the added benefit of the Government providing a 25% bonus on the contributions paid in a tax year at the end of that tax year.

An early withdrawal penalty generally applies if the LISA is cashed in before age 60 and the proceeds are not used in a first home purchase. At 25% of value withdrawn, the penalty more than claws back the Government’s contribution bonus. In effect, the penalty removes 6.25% of the personal contribution, plus any growth.

The penalty was reduced to 20% between 6 March 2020 and 5 April 2021 (inclusive).

8. Leasehold reform – ground rents

The Leasehold Reform (Ground Rent) Act 2022 comes into force on 30 June 2022, except for retirement properties where it will not come into force before 1 April 2023.

It puts an end to ground rents for new, qualifying long residential leasehold properties in England and Wales. After the Act comes into force, ground rent in most new leases cannot legally be for anything more than “one peppercorn per year”. This “peppercorn rent” means that no money can be legally charged or paid as ground rent on leases regulated by this Act.

The Act bans freeholders from charging administration fees for collecting a peppercorn rent. Fines of up to £30,000 may be levied where ground rent is charged in contravention of the Act. There are very few exceptions from the Act, which are:

• applicable community-led housing;

• certain financial products;

• business leases which are defined by the Act as leases of commercial premises which include a dwelling, use of which substantially contributes to the business purposes.

Statutory lease extensions for both houses and flats remain unchanged and are therefore exempt from the provisions of the Act.

For existing leaseholders entering into voluntary lease extensions after commencement, the extended portion of their lease will be reduced to a peppercorn.

9. Leasehold reform – lease extensions

The Leasehold Reform (Ground Rent) Act 2022 does not deal with or remove marriage value. Marriage value assumes that the value of one party holding both the leasehold and freehold interest is greater than when those interests are held by separate parties.

Marriage value is a material issue for leaseholders where their lease has a remaining term of less than 80 years or is close to falling below 80 years. This is because once the remaining term of a lease falls below 80 years, the calculation of the amount that must be paid to a freeholder by the leaseholder (the premium) for a lease extension or to purchase the freehold, will incorporate marriage value. Marriage value does not form part of the calculation where the remaining term of the lease is still 80 years or more.

Marriage value equates to 50% of the increase in the market value of the property arising from the extension of the lease. Where marriage value does apply to the calculation of the premium, the premium can be materially higher than it would be, were the remaining term of the lease greater than 80 years.

Back in January 2021, the Government suggested that future leasehold reform would seek to deal with the issue of marriage value, potentially reducing the cost of extending a lease or purchasing a freehold. The Government has suggested that it will seek to introduce legislation that deals with the issue and cost of marriage value by the time of the next General Election, expected in May 2024.

The Government also proposed introducing a statutory calculation to determine the value of the premium a leaseholder pays to a freeholder – the cost of extending a lease. The overarching aim being to reduce the cost of extending a lease for leaseholders, but there has been no information provided on what this future calculation may be.

And it is expected that leaseholders will be given a new right to extend their lease by 990 years. Under existing legislation, where undertaking a statutory lease extension, leaseholders are currently provided a 90-year extension to the existing term of their lease, i.e. an additional 90 years on the unexpired term of the current lease.

These measures, however, also do not feature in the leasehold reform being introduced by the above-mentioned Leasehold Reform (Ground Rent) Act. Leaseholders with a lease at, or close to having, 80 years remaining will need to consider whether it is better to extend their lease before marriage value becomes payable, rather than waiting for further leasehold reform law to be enacted.

10. The 95% mortgage scheme

A Government-backed mortgage guarantee scheme, intended to help people with 5% deposits get on to the housing ladder, was launched in April 2021. The scheme is available to first-time buyers or current homeowners (individuals rather than an incorporated company) buying a house in the UK with a purchase value of £600,000 or less. For a mortgage to be eligible for a guarantee under the scheme it will need to be a residential, repayment, mortgage (not second homes) and not buy-to-let.

The borrowers who take out any mortgage product under the scheme will remain responsible for repayments in the same way as a normal mortgage. However, the Government will provide lenders with the option to purchase a guarantee on the top-slice of the mortgage. In other words, the Government will compensate the mortgage lender for a portion of the net losses suffered in the event of repossession. The guarantee, which will be valid for up to seven years after the mortgage is originated, will apply down to 80% of the purchase value of the guaranteed property. The lender therefore retains a 5% risk in the portion of losses covered by the guarantee. This ensures that the lender retains some risk in every loan they originate and should help to ensure that lenders are not incentivised to originate poor quality loans.

The scheme is intended as a temporary measure, so it will be open for new mortgage applications up to the end of December 2022. The Government will review the continuing need for the scheme towards the planned end date, and determine whether extending the period of eligibility for new mortgages would continue to deliver benefits for prospective homeowners.

According to the latest Government statistics, 12,388 mortgages have been completed with the support of the scheme, with a total value of £2.2 billion. Of these, 86% of purchases were by first-time buyers.

The above is for general consideration only and consequently we cannot accept any responsibility for any loss as a result of any action taken or refrained from as a result of the information contained in it. The Financial Conduct Authority does not regulate general taxation or trust advice. This article is based on our understanding of the law and HM Revenue & Customs practice as at 20 May 2022.