Richard Rowntree, Paragon’s Managing Director of Mortgages, highlights two important new changes to landlords’ tax treatment following the start of the new tax year. 

Each new tax year typically heralds some form of tax changes for landlords to be aware of and this year is no different. There are two key pieces of tax legislation that have implications for landlords this year – tax relief for finance costs and Capital Gains Tax. 

Tax relief for finance costs

Landlords have had to contend with a layering of changes in fiscal and regulatory policy targeting the buy-to-let market since 2015.

Landlords used to deduct all finance costs from their rental income and profits were taxed at their marginal rate. However, starting from April 2017 and phased in over a four-year period, tax relief for finance costs have been restricted to a basic rate tax credit.

The phased reduction began with claimable tax relief reduced to 75% and continued through 2019-20. In 2020-21, landlords won’t be able to claim any tax relief on mortgage interest payments. Instead, from April 2020, they will receive a 20% tax credit on interest payments.

In response, landlords are adopting a range of different strategies to mitigate the impact of these changes, ranging from rent increases to portfolio resizing. However, as these tax changes have been phased in over a period of four years, we believe most landlords will be well prepared for this latest change.

Capital Gains Tax: Private Residence Relief

Private Residence Relief (PRR) provides a useful exemption from Capital Gains Tax (CGT). Previously, landlords could claim PPR for all the time they lived in their property before letting it to tenants, plus an extra 18 months after moving out. From April 2020, this was reduced to the time they lived in their property, plus nine months, meaning landlords will lose nine months’ worth of CGT relief when they come to sell. 

In addition, CGT relief of up to £40,000 (£80,000 for a couple) was available for those who let out a property that is, or has been, their home. However, from April 2020, this relief only applies to landlords who are in shared occupancy with their tenant, as the government aims to “better focus PRR to owner-occupiers”.

The deadline for payment of your CGT bill also changed in April 2020, from 31 January in the year after the tax year the sale is made, to within 30 days of the completion of the sale.

As always, we would advise landlords to seek independent tax advice when it relates to the management of their property portfolios.