CGT reporting of property sales to be given more time

It was announced that from the start of April all Capital Gains Tax (CGT) from residential property sales would have to be reported and paid to HM Revenue & Customs (HMRC) within 30 days where tax is due.

However, HMRC has now confirmed that it will not charge late filing penalties for reports of CGT on disposals of UK residential property by UK residents made by 31 July 2020 that are made after 30 days.

The announcement, made during an HMRC question and answer factsheet shared with ICAEW’s Tax Faculty indicates that despite the change in rules, taxpayers will not be fined for a breach of the regulations.

HMRC stated: “To help those selling properties familiarise themselves with the change in the rules and a new on-line process, HMRC is allowing a period of time to adjust and will not issue late filing penalties for CGT payment on account returns received late up to and including 31 July 2020.

“For UK residents, this means transactions completed between 6 April and 30 June 2020 and reported up to 31 July 2020. Transactions completed from 1 July 2020 onwards will receive a late filing penalty if they are not reported within 30 calendar days. Interest will accrue if the tax remains unpaid after 30 days.”

It is thought that the temporary loosening of the rules is designed to help those struggling to contact agents or report CGT as a result of the Covid-19 pandemic.

ICAEW Tax Faculty said that the Q&A seemed to suggest that the easement only applied to UK residents and not for non-residents who have already had the rules applied to them

Whilst the charging of late penalties has been postponed temporarily interest will still run on the CGT due, so filing and paying as soon as possible is still highly recommended where possible.

Nasty ground rent stings in long leases

The recent adverse publicity regarding ground rent landlords (including developers) of new build and/or existing blocks of flats or houses which reserve high or potentially high ground rents has a further nasty sting in the tail for tenants of long leases of flats and  houses.

This “sting” emerges if the annual ground rent payable by the tenant is more than £1000 for a property in Greater London or more than £250 for a property outside Greater London – whilst this may not be in say the first 20 years of the term of the lease, ground rent could reach those pretty modest (certainly outside Greater London) levels in subsequent years or even when the lease is granted. If so, the Housing Act 1988 (HA 1988) applies and states that the long lease is an “assured tenancy” – that sounds harmless but it isn’t because, where there is an assured tenancy, the Landlord’s remedies to obtain possession/forfeit the lease are draconian in that it only takes the Tenant to be in 2 months’ arrears of ground rent and the Landlord can serve notice under section 8 HA and issue proceedings and, if the Tenant fails to pay the ground rent arrears before the Court Hearing date, the Court must make a possession order in favour of the Landlord who then gains a valuable long leasehold property (see footnote below) – it would be interesting to know whether landlords have adopted this tactic and how successful landlords have been.

It seems unlikely for tenants to fall into ground rent arrears but unscrupulous landlords may try to exploit this loophole by not serving ground rent demands and hope tenants forget to pay and don’t pay before the time of the Court Hearing for possession.

The bottom line is that this “sting” in the HA 1988 can erode considerably the existing statutory protection afforded to tenants of long leasehold flats or houses

This section 8 HA 1988 procedure shouldn’t be confused with the irrelevant (for long lease terms) defences a tenant has if the landlord brings proceedings for possession under the accelerated section 21 HA 1988 procedure (as amended by the Deregulation Act 2015) – the reason it’s irrelevant is because the tenancy deposit and other protections afforded to tenants (preventing a landlord from obtaining possession unless the landlord has complied) won’t apply nor be relevant for long leasehold terms of flats or houses.

However, it’s unclear what attitude lenders are taking in respect of existing long leases where the annual ground rent already is or will hit the above levels during the lease term.

What is clear (and, as is required under Council of Mortgage Lenders’ (now UK Finance’s) rule book) is that conveyancers and valuers must review these ground rent provisions and draw them to the attention of their buyer and lender clients and the conveyancer must obtain clearance from the lender at the outset i.e. well in advance of exchange of contracts before the buyer client incurs significant fees. Unless incentivised with a hefty premium , landlords are unlikely to agree to a deed of variation reducing the ground rent to well below those levels and it will be appreciated that, even if the landlords are prepared to do so, their costs (which can be substantial) will need to be paid by the Seller or Buyer and there will be delay.

Yes, provided the tenant has been registered at the Land Registry as the owner of the flat or house for at least  2 years (a) the lease term for a flat could be extended under the s42 procedure of the Leasehold Reform (Urban Development) Act 1993 (1993 Act) and (b) for houses, the freehold can be acquired under the Leasehold Reform Act 1967 (1967 Act) but that will come at a cost to a buyer (unless the Seller pays or makes a fair contribution towards the premium and costs) as well as cause delay – the same analysis applies where a flat owner may wish to mortgage or remortgage under section 42 of the 1993 Act  (i.e. cost and delay will arise) – with a house, there is a seldom-used right under the 1967 Act to obtain an extra 50 years’ extension to the lease term and a key reason it is seldom-used is because the ground rent is increased in accordance with modern up to date annual ground rent rates which could exceed, over time,  the nasty £1000 and £250 levels mentioned above.

Tenancies at a low rent and ASTs (including ending ASTs prior to expiry)

As assured shorthold tenancies (ASTs) are a type of assured tenancy, a tenancy cannot be an AST if it does not satisfy the criteria set out in section 1(1) of the Housing Act 1988 (HA 1988), or if it falls within one of the exceptions in Part 1 of Schedule 1 to the HA 1988. The criteria for these tenancies and exceptions are set out in Practice note: overview, Types of residential tenancies: overview.

If, for example, the tenancy was granted after 15 January 1989, it cannot be an assured tenancy (or, by definition, an AST) if it is a tenancy at a low rent, that is:

  • Tenancies for no rent (paragraph 3, Schedule 1, HA 1988);
  • If the tenancy was granted before 1 April 1990, those where the annual rentis less than two-thirds of the rateable value on 31 March 1990 (paragraph 3B, Schedule 1, HA 1988); or
  • If the tenancy was granted on or after 1 April 1990, those where the annual rentis £250 or less, or £1,000 or less in Greater London (paragraph 3A, Schedule 1, HA 1988).

Most leases that reserve a ground rent are usually granted for a premium and are long leases. However, if for example, the ground rent exceeds £250 per annum (or £1000 per annum in Greater London) and the other criteria in the HA 1988 are met, a long lease for which a premium has been paid can be an AST.

One implication of this is that an AST can be brought to an end during the term of the lease by the landlord if one or more of the grounds for possession set out in Schedule 2 to the HA 1988 are made out. This means that if a long leaseholder is in at least 2 months’ arrears of ground rent under a long lease which qualifies as an AST, a section 8 notice under the HA 1988 could be served under ground 8, which is a mandatory ground. Where a ground is mandatory, the court must grant an order for possession if the landlord can demonstrate the ground (section 7(3), HA 1988).

For further advice or if you have any questions please contact a member of our North London Property Team by email or call us on 020 8349 0321.

To be or not to be Assured Tenancies, that is the question!?

Two important points for landlords and tenants:

For landlords of mixed use buildings  to note (where a building consists of a commercial unit(s) and residential flats: if the annual rent is more than £100,000 then, even if the residential tenancy may have been expressed specifically as an assured tenancy , the tenancy won’t be an assured tenancy – the relevance of this is under section 5 Landlord and Tenant Act 1987 (1987 Act) under which a landlord who wishes to sell the freehold or a superior long lease has to first serve notice on the residential tenants giving them the first right to buy the freehold or long lease but landlords are relieved of this obligation where the tenancy is an assured tenancy under The Housing Act 1988(H A 1988).  However, subject to other conditions of the HA 1988  being satisfied, a tenant of a flat which isn’t an assured tenancy has to be served with this section 5 notice under the 1987 Act which , obviously will cause the landlord considerable delay in being able to sell the property  – if the section 5 notice procedure applies, the Landlord commits a criminal offence if the Landlord fails to do so.

For tenants of long leases who wish to sublet: if a lease allows subletting on an assured shorthold tenancy basis only then it could prevent the tenant subletting if the annual rent the tenant could command in the open market for subletting is more than £100, 000 which would not be an assured shorthold tenancy – therefore it is important to ensure that any subletting clause in a long lease doesn’t limit subletting to an assured shorthold tenancy- rather , it should state ” any tenancy which does not confer security of tenancy on the subtenant”.

New PRA rules to shake-up mortgage ‘stress tests’ for landlords

Imminent new rules in relation to so-called mortgage ‘stress tests’ will be phased in between now and October 2017, and could make it more difficult for buy-to-let landlords with large portfolios to access new mortgages.

Under the new rules, which have been recommended by the Prudential Regulation Authority (PRA), mortgage lenders will need to implement drastic new measures to strengthen stress-tests for any landlords who currently own and let out four or more mortgaged properties.

This means that so-called ‘portfolio landlords’ will be assessed on how potential interest rate rises might affect their ability to pay their mortgage, while rental income will be much more thoroughly checked and assessed before a new loan can be granted.

In fact, portfolio landlords will need to prepare and supply detailed tax and financial information when applying for any new loans once the new rules are in force.

Such information must include tax returns for any properties in their existing portfolio, cash flow projections, business plans, information regarding assets and liabilities and more.

Landlords are being warned that they must take great care in preparing and supplying this information, as any errors or inconsistencies noted by the lender in the financial information provided will inevitably result in a rejection of the mortgage application.

Furthermore, landlords are advised to be wary that lenders are unlikely to take a ‘one size fits all’ approach to their stress tests – meaning that shopping around for the best deal may prove time-consuming and complex, while traditional ‘agreements in principle’ may soon be a thing of the past.