Tax Changes UK Homebuyers And Sellers Need To Be Aware Of

Paul McGerrigan, CEO of the online mortgage and loan brokerage Loan.co.uk has compiled a guide to the tax changes UK homebuyers need to be aware of in the 2020/21 Tax Year.

With the beginning of the new tax year on 6th April, life as we know it has changed in the UK. In a bid to control the COVID-19 pandemic, new government measures have resulted in the majority of businesses and consumers going into lockdown. Alongside the immediate health implications of the virus, COVID-19 is also posing significant challenges when it comes to managing individuals’ finances.

Indeed, the Government has done all it can to mitigate the unprecedented nature of the Coronavirus pandemic, announcing over £350billion of funding to offset the losses that could be experienced by businesses. What’s more, measures have also been introduced to support borrowers, including the opportunity to apply for a three-month mortgage payment holiday.

Under such circumstances, many taxpayers might also have overlooked the fact that the 2020/21 tax year is also upon us. Importantly, come April 6th new measures will affect the way that everyone, from homeowners to investors and consumers, are able to manage their finances.

The 2021/21 tax year brings about significant changes to those involved in the property market. Below is a list of reforms to take note of.

Inheritance Tax

As it stands, the standard rate of inheritance tax is set at 40%, but from 6th April, taxpayers inheriting property from direct relatives will now be able to come into £175,000 worth of property tax-free. This means that heirs will be able to inherit an estate valued at £500,000 without being subject to tax charges. What’s more, married couples can pool their allowances when planning to transfer an estate to a child or grandchild, meaning that this tax-free allowance doubles to £1 million.

Mortgage Interest Rate Relief
As of April 2020, private landlords in the UK will no longer be able to deduct any of their mortgage expenses from rental income. This comes as a result of rolling reforms first implemented in April 2017, which have been designed to phase out tax relief offered on mortgage interest.

Before the reforms came into place, landlords were only required to pay income tax on their net rental income, which provided relief in the form of a reduction on taxable income. Now, all mortgage interest will only receive tax credit, with tax relief restricted to the basic rate of income tax, set at 20%. With the beginning of the new tax year, new reforms to the scheme mean that relief will only be offered as a tax liability, and buy-to-let mortgages cannot be used as a tax advantage.

Capital Gains Tax

Another big change to be implemented from the 6th April are reforms to Capital Gains Tax (CGT), particularly when it comes to the buy-to-let market. The introduction of a 30-day payment window means that any homeowner who has made a profit from the sale of residential property will be liable to pay CGT with a much quicker turnaround. This is a noteworthy change from the current policy, which gives homeowners between 9 to 18 months to make the necessary payments.

More generally, the annual exempt amount for CGT will increase by £300 to a new total of £12,300. It is vital, therefore, that sellers are aware of the reduced timeframe in place for payments, as failure to report and pay on time will result in HMRC imposing interest, and potential penalties.

Upcoming changes to Stamp Duty

For those hoping to see significant reforms to Stamp Duty policy, Rishi Sunak’s recent 2020 Spring Budget did not deliver. Instead, the Chancellor announced a 2% surcharge for non-UK resident buyers, which is set to be introduced as of April 2021.

The reform comes after the Government had previously announced in 2019 that it was looking into implementing a 1% surcharge, in an attempt to stop prospective UK homebuyers from being priced out of the housing market – particularly in London, where foreign investment in property has seen prices rise rapidly over the past decade. It was hoped that the overhaul would encourage domestic UK residents to take their first steps on to or move up the property ladder.

Although this might seem like bad news for overseas buyers, there is a silver lining. Many believe that there is the potential to create a ‘mini London boom’ between now and the implementation of the reforms next April. As the reforms will not come into force for another year, many international buyers will likely be rushing ahead to complete transactions before the surcharge is introduced.

It is undeniable that the outbreak of COVID-19 has had an unprecedented impact on the way we work and live. However, it is crucial that in light of these current events, taxpayers take heed of the upcoming changes that are coming into force as part of the new tax year, as well as the Government’s evolving response to the pandemic, in order to manage their finances and investment portfolios effectively.

This article was written by Paul McGerrigan, CEO of Loan.co.uk – an online brokerage for mortgages and loans.

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