With the coronavirus pandemic still having a huge impact on the economy, government spending and borrowing, it’s widely expected that tax changes could be coming early in 2021.
But what changes can we expect and how will these affect homeowners, buyers, sellers and investors?
Stamp duty changes in 2021
Stamp duty rates were changed in July 2020.
Under the current rules, all buyers are exempt from stamp duty on the first £500,000 of a property’s purchase price.
Landlords, or buyers of second homes, meanwhile, are also exempt, but still have to pay a 2% additional property surcharge.
Stamp duty rules in 2021
Stamp duty rules that were in place prior to July 2020 are set to come back into force from April 1, meaning buyers will pay no stamp duty on the first £125,000 of a property’s purchase price, with first-time buyers exempt on the first £300,000.
Buyers from overseas, meanwhile, will have to pay an additional 2% stamp duty surcharge from April 1, 2021.
Capital gains tax on property
One of the most talked about potential tax changes in 2021 has been capital gains tax.
How capital gains tax works
Capital gains tax (CGT) is payable when you make a profit from selling something that has increased in value.
You pay tax on the ‘gain’, which is the difference between what you paid for something and what you sell it for – and the rules include property that isn’t your main residence.
The current capital gains tax rules
If you sell your main residence, you won’t pay capital gains tax – but if you sell an investment property, you could be liable if you’ve made a gain.
Equally, if you sell a property you inherited, you could have to pay capital gains tax on the difference between its value when you inherited it and the price you sell it for.
Under current rules for the 2020-21 tax year, the capital gains tax-free allowance is £12,300.
Your capital gains tax bill depends on what rate of tax you pay on the rest of your income.
If you earn more than £50,000 a year, you’ll pay 28% capital gains tax on the sale of residential property.
If you pay the basic rate of income tax, however, which is 20% on earnings between £12,500 and £50,000, you’ll pay 18% on gains from residential property.
Potential changes to capital gains tax in 2021
No changes to capital gains tax from April 2021 have been announced.
However, potential changes that could come into force include:
- Reducing or even removing the CGT-free allowance
- Aligning CGT rates with income tax rates, meaning basic rate taxpayers would pay 20% in CGT, higher rate taxpayers 40% and additional rate taxpayers 45%, rather than 18% and 28%
Making Tax Digital
For landlords whose rental properties turn over more than £85,000, digital tax changes are set to come into force during 2021.
The Making Tax Digital (MTD) system is set to become mandatory for those whose businesses turn over more than £85,000 at some point in 2021 – but no date has yet been confirmed.
Those using the MTD system send four quarterly submissions on income and expenses rather than the traditional annual tax return, before signing a declaration confirming their numbers at the end of the tax year.
Income tax and mortgage interest tax relief
Since April 2020, landlords have been unable to deduct mortgage interest expenses from their annual tax bill.
Instead, they receive a 20% tax credit based on the amount of mortgage interest they pay.
The changes had been phased in since 2017 and mean some landlords will still be getting to grips with the new rules, either because their tax bill will have increased or they have been forced into a higher tax bracket.
The changes to mortgage interest tax relief only affect individuals, so those whose rental properties are run through a limited company are unaffected.
Paying tax when operating rental properties can be complex, but our guide explains everything landlords need to know, from allowable expenses and wear and tear to capital gains tax and stamp duty.
If you’re a first-time buyer, meanwhile, there are a whole host of questions you should be asking on a viewing – we’ve outlined the most important right here.