The UK Government has introduced several new property tax policies in recent months which may affect you if you are planning to buy, let or sell property in the UK. Some have interpreted these changes as an attack on landlords and second home owners.
Buying
Residential Properties
The changes to stamp duty when buying a property has changed significantly over the past two years. Before 4th December 2014 people had to pay stamp duty at one rate which was determined by the value of the property. This was replaced with the current “slice” system which means that stamp duty is calculated only on the property price that falls within the band.
| First £125,000 | 0% |
| £125,001 – £250,000 | 2% |
| £250,001 – £925,000 | 5% |
| £925,001 – £1,500,000 | 10% |
| Above £1,500,000 | 12% |
Under this system a property bought for £500,000 would have stamp duty of £15,000. However, as part of the 2016 budget it was announced that from 1 April 2016 there was to be a surcharge of 3% on second homes costing over £40,000.
| 1st property | additional properties | |
|---|---|---|
| First £125,000 | 0% | 3% |
| £125,001 – £250,000 | 2% | 5% |
| £250,001 – £925,000 | 5% | 8% |
| £925,001 – £1,500,000 | 10% | 13% |
| Above £1,500,000 | 12% | 15% |
Therefore, the same property above bought for £500,000 as a second home will incur a stamp duty cost of £30,000.
This additional surcharge will apply in cases where you own a share in a property, are buying a holiday home or even own property elsewhere in the world.
For those in England, Wales & Northern Ireland there are easements on this surcharge for the following;
- Residence B was bought before Residence A was sold. The surcharge must still be paid however can be claimed back if Residence A is sold within 36 months of Residence B being bought.
- Residence A was sold while owning Residence B. If Residence A was your main residence, there is a grace period of 36 months in which to purchase your next main residence before the 3% surcharge is applied.
- Residence B purchased but you have already inherited Residence A. The 3% surcharge does not apply provided
- You own not more than a 50% interest in the property inherited
- You inherited a single property
- The property was inherited within the 36 months before purchase of Residence B
Non- residential properties
From 17th March 2016 the slab system was replaced by the slice system for non-residential properties. This new system also covers any properties for mixed use of residential and non-residential.
| First £150,000 | 0% |
| £150,001 – £250,000 | 2% |
| Above £250,000 | 5% |
Letting
Interest on borrowing
The 2015 summer budget set out legislation to reduce the relief gained from interest on mortgages against rental residential properties. For income tax purposes (but not for corporation tax, where there are no proposals for change), interest will no longer be set off against rental profits, but will only be available as 20% tax relief against your tax bill. This will affect those landlords who pay income tax at the higher rate (40%) & the additional rate (45%).
This change to the relief will not come into immediate effect but will progressively reduce as follows.
| 2017/18 | 35% |
| 2018/19 | 30% |
| 2019/20 | 25% |
| 2020/21 | 20% |
This will result in the possibility of individuals paying tax on their rental income despite making losses especially with landlords with large mortgages.
| 2016/17 | 2020/21 | |
|---|---|---|
| Rent | £ 60,000 | £ 60,000 |
| Costs | (£ 10,000) | (£ 10,000) |
| Interest | (£ 40,000) | – |
| Taxable profit | £ 10,000 | £ 50,000 |
| Tax @ 40% | £ 4,000 | £20,000 |
| Interest Relief | – | (£ 8,000) |
| Liability | £ 4,000 | £ 12,000 |
| Interest (2020/21) | (£ 40,000) | |
| Profit after tax | £ 6,000 | (£2,000) |
In this example the profit in 2016/17 is £6,000 whereas in 2020/21 due to the increase in tax from 40% to 120% of profit (including interest) the property made a £2,000 loss.
If you find yourself in this position in 2020/21 or are likely to, please consider the following solutions:
- Repay mortgages with any spare cash you may have or by selling a property. This may result in issues with any current tenants or capital gains.
- Convert a rental property to a furnished holiday let. This can result in issues with VAT and this is considered a sole trading business therefore may incur national insurance.
- Control other forms of income. Reduce dividends received, transfer shares to a spouse, change to a partnership.
- Think about transferring your property portfolio to a limited company (see below)
Before taking any actions, please consult an advisor to find the combination of the above to fit your specific situation.
If you have mortgages on both your buy-to-let property and your main residence, consider increasing the mortgage on your buy-to-let and paying off some or all of the mortgage on your main residence. This maximises the proportion of interest costs that is available for use as a relief against your tax bill.
Wear & Tear
Until 6 April 2016, a wear and tear allowance, equal to 10% of rents, was available to cover the costs of furniture and white goods in fully furnished properties. This has been abolished and replaced with an allowance for the like for like replacement costs of assets bought during the year. This has been bought about due to rent rising higher for some than the cost of assets and that part furnished properties were not eligible. Excluded from being claimed against profits are integral features such as baths and showers, kitchen units, boilers etc.
The Government expects an overall tax increase of c £200 million a year as a result of abolishing wear and tear allowance, and there is likely to be an increased administrative burden for landlords who have to track their expenditure.
Rent a Room relief
Rent a room relief (a tax exemption for those who let out a spare room in their home) has been increased from £4,250 to £7,500 a year from 6 April 2016, which is shared between the owners of the house if jointly owned. Additionally, from 6th April 2017, there will be an additional £1,000 tax free allowance for those renting out a room, driveway or loft storage which is in addition to rent a room relief.
Selling
Transfer to Company
Many property owners are considering ownership of properties through a company, to take advantage of full tax deductibility for mortgage interest (at least for now) and corporation tax rates, which are much lower than income tax.
If you wish to transfer ownership of the properties in your portfolio to a company there are a few things to consider. As you will see below, each point will require careful consideration individually and in the end it may be more tax efficient to continue reporting your rental profits on your tax return. It may only be worth considering transferring to a limited company if you have rental profits of at least £5,000 taxable at the 40% rate. Some landlords are choosing to retain existing properties in personal ownership, with any new properties being bought through a company.
As you are, in effect, disposing of your portfolio and selling to your limited company there may be capital gains and stamp duty implications of the sale.
The legislation requires that the sale of a property to a company owned by the current owner is deemed to take place at the open market value for stamp duty purposes. This will apply regardless of the consideration given by the company.
For capital gains, you will have to declare your disposal to HMRC within 6 months and calculate your gains on your tax return which may turn out to be very expensive. However due to a landmark case in the Upper Tier Tax Tribunal (Elizabeth Moyne Ramsey v HMRC) in certain circumstances the seller can claim relief under s162 Taxation and Chargeable Gains Act 1992, which will defer any tax until the property is sold by the acquiring company.
In order to claim this relief the property/properties must be deemed a business instead of an investment. It is possible that HMRC may appeal this decision, but for now this is considered law. Some indicative factors in determining whether your portfolio is business or investment include the following:
| Investment | Business | |
|---|---|---|
| Full time Employment | Yes | No |
| Uses agent to collect rents | Yes | No |
| Selects tenant yourself | No | Yes |
| Collects rent yourself | No | Yes |
| Undertakes minor maintenance | No | Yes |
Please note this is not an exhaustive list and individual circumstances must be considered in each case. Finally, it is also worth noting that even though capital gains tax rates generally have dropped to 10% basic rate & 20% higher rate the rates are still 18%/28% respectively for residential properties- another example of the penal tax regime for property owners.
As the properties have been transferred the mortgages and other liabilities will need to be transferred to the company as well. This may result in increased costs, as interest rates for businesses tend to be higher than for individuals, possibly counteracting the benefit of full tax deductibility for interest paid by companies.
There is also “ATED” (Annual Tax on Enveloped Dwellings) to consider will effect high value properties over the value of £500,000, to see the amounts chargeable please see the table below:
| Property Value | Annual charge |
|---|---|
| £500,001 to £1,000,000 | £ 3,500 |
| £1,000,001 to £2,000,000 | £ 7,000 |
| £2,000,001 to £5,000,000 | £ 23,350 |
| £5,000,001 to £10,000,001 | £ 54,450 |
| £10,000,001 to £20,000,001 | £ 109,050 |
| More than £20,000,001 | £ 218,200 |
This tax will be charged on any company or partnership with a corporate partner which holds an interest in a UK residential property. It is possible to claim exemptions or reliefs from ATED, therefore please consult your tax advisor for further information.
Finally there is the admin required for a limited company which is higher than a self-assessment tax return as there are shares to issue, annual returns and accounts to complete which may be an admin complication you may not be able to meet on time.
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