If you’re self-employed or have a profitable investment portfolio, you’ll know that January means it’s time to pay your tax bill.
As a general rule, tax paid in January relates to income earned during the previous tax year. So this month I’ve paid tax relating to my earnings in the year that ended on 5 April 2019.
For buy-to-let landlords, this system means that you could have sold a property on 6 April 2018 and not needed to pay the resulting capital gains tax (CGT) until January 31 2020 – nearly two years later. During the intervening period, you’d have had unrestricted use of your tax cash.
Payment within 30 days
However, that’s all about to change. Under new rules that come into force from 6 April 2020, you’ll have to pay any CGT due on residential property sales within 30 days of the sale completing.
The new rules will apply to landlords selling property they own directly. Property you own through a limited company won’t be affected.
This change was originally put forward by former Chancellor George Osborne in 2015, but was delayed. It’s now going ahead.
These changes could increase your tax bill
The timing of CGT payments isn’t the only thing that’s changing. Two other changes being introduced this year could cause your tax bill to rise.
The first is the end of letting relief. Until now, you’ve been able to claim up to £40,000 CGT relief when you sell a rental property that was previously your main home. Letting relief will no longer be available after 6 April 2020 unless you are in shared residence with a tenant.
The second change relates to the tax holiday applied to the final period of ownership of a property. At the moment, you don’t have to pay CGT relating to the final 18 months of ownership. This tax-free period is being cut to nine months.
For many landlords, both of these changes will lead to an increase in taxable capital gains.
I almost forgot this
I almost forgot one other change that’s coming this year – mortgage tax relief is changing.
From 6 April 2020, you’ll be able to claim 20% tax relief on your mortgage interest costs, but no more. This marks the end of a tapering process that start in 2017.
Why I’m buying stocks
As I’ve commented before, I think high house prices and a tougher tax regime mean that it’s a bad time to start out in buy-to-let investing. I’ve been putting my spare cash into the stock market, where costs are lower and the tax treatment can be much more generous.
You can pay up to £20,000 into a Stocks and Shares ISA, which means all future capital gains and income will be tax free. Even if you keep you shares in a taxable shareholding account, you only have to file a tax return at the end of each tax year and pay by the following January, in the normal way.
Stamp duty on stocks is much lower too, at just 0.5%. That compares well with the 3% to 15% that’s payable on buy-to-let purchases.
At the time of writing, the FTSE 100 offers a dividend yield of about 4.3%, plus the potential for longer-term capital gains. In my view that compares very favourably with the prospects for rental income and capital growth from the housing market.
I’m going to stick with stocks.
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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.