We met Edwards Greene at a recent business network meeting. They are a boutique firm of chartered accountants who specialise in tax advisory, compliance and accounting services for private clients. Today they have kindly shared their top tax tips which to help give you some extra guidance.
1. Make sure you tell HMRC which of your properties should be treated as your main home for tax purposes when you buy a second (or even third) home.
The property that has always been your main home is free of capital gains tax (CGT). Any other property where you have lived for part of the time will attract a CGT exemption for the periods you have lived there and have elected for it to be your main home. If a property has been your nominated home at any time, the gain for the last 18 months of ownership (reducing to nine months from 6 April 2020, but always 36 months if moving into residential care) is free of tax, even if you do not live there during that final period. The same does not necessarily apply where an overseas property is involved.
2. Beware of the additional surcharge of land transaction duties which can apply to residential property purchases.
An additional 3% (England, Northern Ireland and Wales) or 4% (Scotland) is payable where a second or subsequent home is purchased for £40,000 or more. The additional charge is added to the relevant duty, with rates varying by country. However, if you are replacing your main residence, and sell your old home within 36 months (18 months in Scotland), you can reclaim any extra duty paid.
You can get caught by this extra charge if you buy a property following an informal separation from your spouse or civil partner.
3. Take advantage of the individual savings account (ISA) investment limit and generate tax free income and capital gains.
The maximum annual amount that can be invested in ISA’s is £20,000 (2019/20). You can put the whole amount into a cash ISA, a stocks and shares ISA, an Innovative Finance ISA, or any combination of the three as desired. Transferring funds into an ISA early in the tax year will maximise the amount of tax-free income arising. The availability of the tax-free savings and dividend allowances may mean that ISA’s provide no benefit for many small savers, but ISA’s can still offer tax advantages.
4. If you let residential property, take action to lessen the impact of the restriction on tax relief for finance costs.
The restriction is being phased in. For the current tax year, only 25% of finance costs, including mortgage interest, are deductible, and a 20% tax credit is given in their place. From next year, all tax relief on finance costs will be replaced by the 20% tax credit.
The restriction can be avoided by using a limited company for new buy-to-lets, or transferring your existing property business into a company. You could consider selling some properties to pay some or all of the borrowing on the ones retained, or replacing residential properties with commercial let properties. However, be warned before taking such steps – other taxes such as CGT and land transaction charges need to be considered.
5. Be careful of your UK residency status.
Your UK residency status is determined on a year-by-year basis if not automatically resident or non-resident, your status is based on the number of days you spend in the UK and the number of ties you have. There is no averaging of days of residence between tax years. You need to be particularly careful if you have left the UK, and want to remain non-resident for tax purposes based on the number of UK ties that you have. You also need to be careful of the number of days that you spend working in the UK. A detailed record of your movements is essential.
6. Make sure you can benefit from the inheritance tax (IHT) residence nil rate band.
This addition to the nil rate band is worth up to £150,000 in 2019/20, rising to £175,000 next year. It is only available where your home is inherited by your direct descendants on your death, or where the property passes to certain types of trust. You may have to rewrite your will so that the residence nil rate band is available. It might be beneficial to repay mortgages secured against your home in order to maximise the relief. The relief is restricted if your estate is worth over £2 million on your death, so it’s worth making some lifetime gifts to reduce the value of your estate below this threshold.
If you need any tax or trust assistance, please do contact Edwards Greene – 01483 399499 www.edwardsgreene.com