Tuesday, June 27th, 2017
As Chartered Accountants, we have seen that the prospect of having to pay more tax has been a major concern for many landlords throughout the UK in the past couple of years. The mostly negative changes brought in by HMRC appear to have created much confusion as to whether residential property investment remains a viable option for some.
Here at Wolverhampton based tax advisors and accountancy firm, Copia Wealth & Tax, we receive many requests for further information from those with residential property portfolios and consequently we thought we would summarise some of the key issues in this month’s article.
One major change involved Stamp Duty Land Tax and the additional 3% surcharge imposed both on individual and corporate buy to let investors. This affects all those who purchase residential property, with the higher taxation rates affecting those who own two or more residential properties once a transaction concludes. Property purchases valued at less than £40k are excluded, as are mobile homes, caravans, houseboats or non-residential properties.
Please note that your own home can be caught up in this calculation too. Should you buy your new residence before selling your existing home, you will be required to pay the surcharge on the new purchase but then have 36 months to reclaim it from HMRC.
The surcharge makes adding to your property portfolio much more expensive – if you would like to calculate the potential cost, download our FREE Copia App which includes tax tables for stamp duty land tax calculations. Oh, and lots of other useful stuff too!
Probably the most controversial tax measure affecting landlords is the change to treatment of mortgage interest and other finance costs. It is only applicable to residential property, and so does not apply to furnished holiday lets or a commercial lettings business. It will also not affect those with property in a limited company, but will affect partners in Limited Liability Partnerships (LLPs) and Partnerships.
In terms of your finance costs (e.g. mortgage interest and arrangement fees), after calculating your full tax charge at your marginal rate, only 20% of the finance cost will be allowed as a deduction against your tax liability. Effectively, tax relief on mortgage interest and other finance costs is now restricted to 20% even if you are a higher rate taxpayer!
From April 2017, a 4-year phasing in of these rules will commence meaning that thereafter, these finance costs will no longer be deductible when calculating rental profits. The new finance costs restriction will be phased as follows:
There are strategies landlords may consider using to limit the impact of these changes, such as using a limited company or transferring property to a spouse, but as always, professional advice is strongly recommended to ensure that any other tax implications are taken into consideration too.
If you need help with this, call the property taxation services team here at Copia Wealth & Tax Limited and we will be delighted to help clarify matters for you.
For the 2015/16 tax year and prior, if you let out a fully furnished residential property, you could claim a Wear & Tear allowance, being 10% of the net rent received. This was perceived to be a generous allowance as it could be claimed, even when furnishings were not purchased.
From 6th April 2016, the more generous Wear & Tear allowance was abolished and a new system introduced. You can now claim the cost of replacing furnishings but not the initial cost, provided that the replacement is like-for-like or the nearest modern equivalent. It is well worth considering how this may affect your ongoing taxable profits if you have fully furnished residential property.
This does not apply to furnished holiday lets which benefit from the capital allowances regime.
Sadly, recent reductions in Capital Gains Tax rates to 10%/20% do not apply to residential properties when sold by individuals. Also, from April 2019, Capital Gains Tax will become payable 30 days following a property’s disposal date.
For those in receipt of income from residential property, these changes could result in significantly higher tax bills. If you would like to know more about the impact on your finances, call Copia Wealth & Tax today on 01902 783172 to find out more about what we can do to help our clients maximise the income from their residential property portfolios at Wolverhampton’s leading accountants