On 6 April 2021, we began a new tax year, which means a new set of allowances and new rules to be aware of regarding taxes on property. Here are what the updates could mean for you.
INDIVIDUAL SAVINGS ACCOUNT (ISA)
At the start of the tax year, your Individual Savings Account (ISA) allowance resets, allowing you to contribute up to £20,000 to an ISA (or several ISAs of different types) before 5 April the following year. The proceeds from any money you choose to contribute to your ISA are protected from taxes that you might otherwise incur when you accrue interest or investment gains. If you’re saving to buy a property, you might choose to use an ISA as your main savings account. For first-time buyers, Lifetime ISAs are an option. Though you can only use £4,000 of your ISA allowance to make contributions into a Lifetime ISA (or LISA), the government adds a 25% bonus, meaning you get up to £1,000 extra. Bear in mind, though, that a Lifetime ISA can only be withdrawn when buying a property (with certain conditions) or once you reach the age of 60.
CAPITAL GAINS TAX
Capital Gains Tax (CGT) on property is charged at different rates and for residential property, it is now a requirement to report and pay any taxable gains within 30 days of the completion of a sale. The personal Capital Gains Tax annual allowance for 2021/22 is the same as in the previous year, £12,300. This means that any relevant gains you make within that limit will be tax-free, while gains above the allowance will be taxed. The normal reporting deadline for capital gains is 31 January following the end of the tax year in which you make a gain. Capital Gains Tax does not apply to profits you make from selling your home (your main residence) but it does apply to second homes, including buy-to-let properties. If you own a second home with your partner, you can apply both of your tax-free allowances when selling the property, meaning that only gains over £24,600 will be taxed.
The Inheritance Tax Nil-Rate Band remains at £325,000 for this tax year, with an additional Residence Nil-Rate Band of £175,000 that applies to a home inherited by a direct descendant. So, if you inherit a property from a parent or grandparent, the first £175,000 of the property value is automatically tax-free. Whether Inheritance Tax is payable on any property value above that threshold depends on whether the total estate of the deceased person exceeds £325,000 (after taking into account any other reliefs that may apply).
PROPERTY INCOME ALLOWANCE
The property income allowance for 2021/22 is £1,000. This means that the first £1,000 of income you make from property is tax-free. For developers or buy-to-let landlords with a property portfolio, this won’t dramatically reduce your tax bill. But, if you make a small income from property, such as by renting out a room occasionally, it can make a difference.
RENT A ROOM
The government’s Rent a Room scheme allows you to earn up to £7,500 tax-free by renting out long-term furnished accommodation in your own home. This applies to resident landlords and to those who run a B&B or guest house. Unlike the Capital Gains Tax allowance, you cannot pool your Rent a Room allowance with a partner. If you share the profits of the room rental with another person, you can each only claim half the total allowance.
MORTGAGE INTEREST TAX CREDIT
From April 2020, buy-to-let landlords were no longer able to claim tax relief on mortgage interest and have instead received a tax credit of 20% on mortgage interest. Now that the 2020/21 tax year has ended, this change will affect the next self-assessment tax returns.