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An update on one of life’s certainties: questions answered on UK property tax

Rachel de Souza of RSM and our own Colin Campbell and John Williams answer client questions on recent UK property tax changes and how these might be mitigated in this Q&A.
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Published 4 December
15 mins

Every November, Nedbank Private Wealth holds an annual review of the London market for residential property, which also includes an update on property taxes.

As events shifted online in 2020, we decided to hold our property tax update separately to ensure that we covered the considerable changes and developments in this area, which may have passed people by during the pandemic.

Hosted by Colin Campbell (CC), private banker and lending specialist with Nedbank Private Wealth, he was joined by John Williams (JW), head of wealth planning at Nedbank Private Wealth. Given Nedbank Private Wealth does not give tax advice, we were delighted that Rachel de Souza (RdS), a partner in the private client team at RSM, could also join.

You can watch a recording of the 45-minute session here and, given the breadth and detail of our discussion, we pulled together the following overview of the questions posed to our panellists during the session and their answers.

1. Given the number of changes over recent years, is there an overview of the key residential property taxes that buyers and sellers need to be aware of?

RdS: It can be confusing given the number of recent changes and, as such, I tend to follow the lifecycle of property, starting with acquisition and ending with its sale, to explain what taxes are due and when.

Starting with the purchase, buyers have to pay stamp duty land tax in England and Northern Island, and equivalents in Scotland and Wales, at a rate that varies with the purchase price. Following the announcements in July 2020, there is now a ‘holiday’ in place until 31 March 2021 to cover the standard level of the taxes on properties up to £500,000 in England and Northern Ireland, and £250,000 in Scotland and Wales. Additional higher rates still apply for purchasers who already own an existing property, anywhere in the world.

Sources: UK, Scottish and Welsh governments. Higher rates include additional levies for individuals buying second homes and buy-to-let properties, as well as individuals based overseas. Rates are valid until 31 March 2021, unless a change is announced.

From 1 April 2021, meanwhile, an additional surcharge of 2% will be introduced for non-UK residents (as defined for stamp duty purposes). So, if you are buying a UK property on or after 1 April 2021, you will have to pay this, in addition to the existing 3% second home surcharge, if you do not live in the UK. This is the case even if you are a UK national, although those moving back to the UK within a 12-month period may be able to reclaim that if they then satisfy the residence conditions.

CC: And while we believe that there may be a bit of a rush ahead of this deadline, it doesn’t have much of an influence on the higher-end of the property market, given the sums involved and the repercussions of the fluctuating value of Sterling. As we learned from the LonRes data provided at our webinar on 5 November – again published in a Q&A shortly afterwards – over the past six years, property prices in prime central London have fallen by 14% in Sterling terms, but by 37% in US Dollar terms, which translates into an average of US$1,150 per square foot. As such, it is possible to make up the amount by timing the currency exchange into Sterling to your advantage.

RdS: Once you own your property and you want to rent it out, then you have to pay income tax on the rental income and you cannot offset your financing cost as a direct deduction as you once could. Instead, relief for financing costs is now restricted to 20% for personally held property.

If any capital gains tax is due, you have just 30 days to register yourself with HMRC, prepare the return and pay your tax. This is causing issues as you need to put the registration number on the details being submitted in order for the filing to be made and that’s a very short window to work out all the details – and especially if you have owned the house for many years. It’s worth pulling the paperwork together and alerting your tax adviser as the sale is completed or, even better, on exchange.

I think it’s also worth flagging the taxes due on inheriting a property. If you are leaving property to direct descendants, then you can apply an extension in the form of the residence nil rate band (RNRB) of £175,000 per person, on top of the £325,000 threshold, which can allow a couple to bequeath up to £1 million before any taxes are due. However, there is a ceiling on the value that this extension can be applied to of £2 million, after which the amount tapers off. When your estate is worth more than £2.35 million then the RNRB is zero.

JW: One of the points that has come up in conversations with clients is the recent change in the treatment of PPR. While this applies to homes while a client occupies the property, there is also a period of deemed occupancy when the owner is not actually in situ. This is really helpful as it allows clients to still have time to sell a property if they have already, perhaps, moved to a new family home. But this period has now reduced – for the majority of homeowners – to just nine months in April this year, from 18 months before.

2. You mentioned that capital gains tax relief may not be due in certain cases on your main residence. What are those?

JW: These tend to be niche examples, but we have seen a couple of cases come up where the land on which the property stands is larger than half a hectare (i.e. 1.25 acres), which we covered in an earlier article. Another instance is where part of your home has been used ‘exclusively’ for business purposes while you have owned it. There are other reasons also, so it’s worth a conversation with a tax adviser as you begin the sale process.

3. Can we talk specifically about landlords now, given they are having a tough time of it of late given the increased taxes and reduced rents due to the pandemic. What do landlords need to be aware of?

CC: We discussed during the property webinar on 5 November how some parts of the rental market are struggling, particularly with flats where there is no outdoor space and where there is a shared entrance and/or amenities, which is raising questions among tenants as to the cleaning schedule.

RdS: The plight of landlords has been well covered in the news and this has led to a slowdown in people buying certain properties for investment purposes/buy-to-let portfolios, but it hasn’t come to a full stop. There are still lots of people that consider property is a very important investment asset.

The most frequent question we are asked is whether it is worth taking advantage of the stamp duty holiday to transfer ownership to a corporate structure. The big issue is the finance costs. A few years ago, these were fully deductible against rental income. But this has changed and this relief is now limited to the basic 20% tax rate. Meanwhile, finance costs can still be deducted if the ownership is through a corporate structure.

It is, however, worth watching the case study detailed on the webinar [from 19½ minutes], as while ownership through a company might make sense if the money is to be kept within the structure (given that you can offset the finance costs and since corporation tax is currently at 19%), you typically still want to be able to access the money. In this case, a dividend is then paid out by the company to you, which is again taxed at a rate based on your income tax rate band, which for higher rate tax payers is 32.5% and for additional higher rate tax payers is 38.1%.

As such, there is not a clear cut answer to the question. You have to ask yourself whether you want the money as income to spend, in which case personal ownership may be the better option, or if you are happy for the money to accumulate in a corporate structure, then you might prefer to hold your property portfolio within a company. The decision may also be influenced if financing costs are higher. Each case has to be reviewed on an individual basis.

JW: Finally, there is also a lettings relief to be aware of. Before 6 April 2020, where a property was at some point an individual’s main residence, capital gains tax relief was available on up to £40,000 of gains (per owner) in situations where the property was also let. This is now only available where the owner is also residing in the property at the same time as the tenant (e.g. lodgers).

4. Is there an alternative for the corporate versus personal holdings decision?

JW: For many clients the cost of transferring existing properties to a company in the form of both capital gains tax and stamp duty has been considerable and, as such, this has led to the majority of clients deciding to keep their existing portfolio in their personal name, but purchase any new properties through a corporate structure.

It’s also worth pointing out that for those who have chosen to keep, or transfer, their assets into a property company, the structure also provides useful succession planning options for the family/the next generation, as different classes of shares can be issued to children and grandchildren entitling them to any future increases in the capital value of the company. Although this doesn’t reduce the inheritance tax (IHT) position for the original shareholders, it does limit their IHT exposure so the value of any growth falls outside of their estate.

5. For finance costs to be deductible at 20% against personal income, does the finance have to be a mortgage secured against the property in question, or can you use other borrowing costs (e.g. a mortgage against another property be it a home or an overseas property) if these borrowings were used for property-related investments?

RdS: Yes, it is possible to deduct the finance costs against a broader portfolio within a company, but the borrowed funds have to be used within your UK property business in order for the finance costs to be deductible. Of course, when property is held within a personal name, relief on finance costs is limited as I explained previously.

6. Looking ahead to 2021, what new taxes should property owners be aware of?

RdS: We have talked about the stamp duty holiday, and its equivalents in Scotland and Wales, ending on 31 March 2021, as at the time of writing, as well as the additional 2% surcharge set to apply on and after 1 April 2021.

There are no other tax changes per se that we know of, but it is worth flagging the news that Airbnb is now providing the details of income received by their hosts during 2017/18 and 2018/9 to HMRC. For those who didn’t declare their income, this could result in a nasty surprise landing on their door mat in the form of a new tax demand.

CC: It’s also worth flagging that while some people may have taken advantage of the extra income, many people are not allowed to have Airbnb (or similar) guests stay – particularly unsupervised – under the terms set by their mortgage providers, or their lease holders if it’s a freehold, and/or their insurance company. Property owners should always consult their lender, freeholder and insurer – as appropriate – before entering into any such arrangement.

7. We’ve focused on the ‘known knowns’ of current and future tax rules. What else could be announced in the next spring statement or autumn budget?

RdS: There is a concern not just for property assets, but also for other investments too, that capital gains tax may increase and possibly align with income tax rates. This is just one of the potential changes that could come in for capital gains tax and, in my view, it’s probably a case of debating when we will see change, rather than if. As such, people are debating whether to restructure their investments ahead of any change and, while there isn’t a lot of action at the moment, that could happen. This was actually already the case between 1988 and 2008, as was noted in the recent Office for Tax Simplification’s review. This also detailed, however, that should any alignment be reintroduced, that relief should be given for inflationary gains.

We would hope that changes aren’t introduced in 2021 as this could cause problems while the economy is still weak, but we could still see these introduced before the end of this parliament in 2024. We could, alternatively, see a temporary tax increase for a short period of time to bring in some cash, while allowing an option for some investors to be able to hold off making any changes and shelter their long-term gains.

We have also heard a lot of talk of a wealth tax that would only hit the richest, which is seen as a popular tax, although implementing a new tax fairly and equitably is extraordinarily difficult. How would you value assets, what rates would you charge, what exemptions would apply are all questions that would have to be answered. A new tax is probably further down my list of likely changes, but that’s not to say it might not happen.

CC: Some treasury officials are understood to be keen on introducing a ‘recurring’ wealth tax on properties which may take the form of an annual levy or an additional higher level of council tax for the most expensive properties. At the moment, a house worth £10 million may only be paying around £2,500 a year in council tax

JW: Another I’d add are the potential changes to inheritance tax. We had recommendations provided by the Office for Tax Simplification last year, and we also had a report from an All-Party Parliamentary Group on Inheritance and Intergenerational Fairness in January this year.

This may focus on the restricting of lifetime giving with a lower rate of tax applied on death.

8. If a property is held by two people in shares, on a ‘tenants in common’ basis, and one partner wants to sell their share to the remaining partner, will stamp duty be due to change the deed to reflect one owner? If yes, would the stamp duty holiday be applied? And would the stamp duty be based on the full value of the property or ‘just’ the value of the share sold?

RdS: Stamp duty is payable based on the value of the transaction. If the transfer is done at market value, stamp duty would be payable based on that market value. If the transfer were a gift, no stamp duty would be due. If, however, there is a debt secured on the property, the answer could be different! As always, do seek professional advice.

9. If I buy a property with my child, are there tax implications when this is passed into their sole name?

JW: At a high level, there may be both inheritance tax and capital gains tax implications which should be carefully considered. As such, we recommend any clients really think through their current reasons for purchasing the property, but also how that ownership may evolve in the future, and ensure that any plans reflect the future possibilities.

CC: In addition, if one or more of the property owners is a minor, then it will be difficult to source a mortgage on the property. If finance is required, it may therefore be necessary to consider an alternative ownership structure.

The webinar was the last of Nedbank Private Wealth’s for 2020. But there are already two that people can register for in 2021, the details for which are:

Wednesday 13 January – Our 2021 Market and Investment Outlook

Andrew Yeadon, chief investment officer, is joined by David McFadzean, head of wealth management, as they seek to outline the repercussions of 2020 on portfolios and explore the various events and trends we see could play out in 2021 – depending on the rollout of vaccines and the economic recovery of developed and emerging markets. You can register for the webinar here.

Thursday 28 January – Q1 London Residential Property Review

Given the yoyo-nature of the market in 2020, Colin Campbell is joined by Marcus Dixon, head of research and data analysis at LonRes, and by Rob Cohen, managing director of the MJ Group International, to explore how news from economic and societal developments may affect the property market. Please register here.

And for those who wish to get in touch with Rachel de Souza, her email address is Rachel.deSouza@rsmuk.com. As well as property tax-related questions, Rachel, and her team, are happy to help answer any questions on non-domiciled clients and those holding investments in offshore structures. Rachel also specialises in advising trustees and members of international pension plans.

Clients can borrow against a UK, Isle of Man or Channel Island-based residence, be it a home or an investment property. We also lend against investment portfolios, and loans can be denominated in Sterling, Euros or US Dollars. With clients in 160 countries, we often help clients based outside the UK, and have lent using the same approach across market cycles since 1987.

 

To find out more about Nedbank Private Wealth’s bespoke lending services, please contact your private banker directly or call our client services team on +44 (0)1624 645000. Or you can get in touch using the links to the forms towards the end of this page.

If you fail to keep up loan repayments, your assets used to secure the loan may be at risk and/or your home may be repossessed. Any examples are for illustrative purposes only. The webinars and Q&A do not constitute an invitation or inducement to buy any financial product or service. None of the content constitutes advice or a personal recommendation. Individuals should seek professional advice, based on their jurisdiction and personal circumstances, before making any financial decision.

about the presenters

Colin Campbell

Colin Campbell

Colin joined Nedbank Private Wealth’s London office in 2010 after 15 years with Barclays, working within its retail, commercial and wealth management divisions. He acts as a trusted adviser to a select group of high-net-worth clients, which includes private individuals, professional intermediaries, companies and trusts. Colin provides his clients with a tailored and holistic private banking service, offering integrated banking, lending, investment management and fiduciary services.

 

He is a Chartered Wealth Manager and a Chartered Fellow of the Chartered Institute for Securities & Investment.

John Williams

John Williams

John heads up the wealth planning proposition for the international business. He works with clients and their families, in tandem with their professional advisers, to ensure they have a clear financial plan in place to achieve their financial objectives. Working in partnership with our teams of private bankers, he integrates the benefits of wealth planning alongside our broader wealth management and wealth structuring capabilities.

 

John has over 25 years of advisory and management experience, working for global organisations providing solutions to a wide variety of UK and international clients. He joined from Credit Suisse UK where he was head of wealth planning for five years. He has also held similar senior roles at Barclays and UBS.

Rachel

Rachel de Souza

Rachel is a partner in the London private client team at RSM. She deals with a wide range of issues which affect private clients with a particular focus on non-domiciled clients and offshore structures. She also specialises in advising trustees and members of International Pension Plans.

 

Rachel joined RSM in November 2016 from The Royal Bank of Canada where she was joint head of the London private client tax team. Prior to that Rachel spent 12 years with PwC. Her interest in advising international private clients began early in her career when she did her first overseas secondment in the mid 1990s and she gained further international experience in 2001/02 when she worked in PwC’s Geneva office.

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