BUSINESS IN FOCUS
BUY TO LET PROPERTY CHANGES
A NUMBER OF TAX CHANGES HAVE BEEN INTRODUCED OVER RECENT BUDGETS, SOME ALREADY IN FORCE AND SOME OF WHICH WILL BE STAGED IN OVER A NUMBER OF YEARS, THAT WILL MAKE IT MORE EXPENSIVE TO ACQUIRE A BUY TO LET PROPERTY AND MORE EXPENSIVE TO RETAIN ONE. THE FOLLOWING ARTICLE WILL EXPLORE THE TAX
IMPLICATIONS OF THE CHANGES. STAMP DUTY From 6th April 2016 an additional 3% levy applies to the acquisition of additional residential properties, this change will make it more costly for those wishing to add to their portfolio of properties or entering the buy to let arena for the first time (if they already own their principal residence). There are a number of consequences of the changes that are not overly apparent, for example; an individual who already owns a buy to let property but lives with their parents will incur the 3% charge when they buy their first principal residence, if an individual has acquired a new principal residence but has been unable to sell their old residence at the point of the second acquisition then the 3% levy will be charged, albeit this can be reclaimed if the original property is subsequently disposed within 18 months.
RESTRICTING FINANCE COSTS FOR LANDLORDS Landlords will no longer be able to deduct all of their finance costs from their property income. They will instead receive a basic rate tax deduction from their income tax liability for their finance costs.
62 - PHARMACY IN FOCUS
To give landlords time to adjust, the government will introduce this change gradually from April 2017, over a four year period. From 2020/21, all financing costs incurred by a landlord will be given as a basic rate tax reduction.
The restriction relates to finance costs not just interest, so relief for application fees charged by the lender would also be restricted.
The additional tax payable will depend on your marginal rate of tax and the amount of payable. If you are a basic rate taxpayer there will be no substantive changes to your tax bill. A higher rate taxpayer will, in principle, get 20% relief for interest paid rather than 40%. So if interest paid is £10,000 p.a. the extra tax liability will be £2,000 (£10,000 x (40% - 20%)).
Due to the way in which the legislation is drafted the finance charges are no longer treated as a reduction in income, but rather as a reduction in the final tax liability. Whilst this may appear to give the same result it does have additional implications in that it could push individuals into different earnings
brackets which could change their marginal rate of tax, reduce their personal allowance or trigger a High Income Child Benefit tax charge.
REMOVAL OF THE WEAR AND TEAR ALLOWANCE
Prior to April 2016 landlords could effectively claim 10% of the rental income (adjusted for rates) as an expense for furnished rented properties. From April 2016 landlords are only allowed to deduct the actual costs of replacing furnishings provided for the tenants use in the residential property. The initial cost of furnishing a property is not allowable.
Those landlords who do not consistently replace the furnishings will see their taxable rental profits increasing and hence their tax bill will also increase.
The removal of the Wear & Tear Allowance and the restriction on the finance charge will increase tax liabilities for the vast majority of landlords. Those higher rate landlords whose income barely covers their mortgage interest may well find themselves paying tax where previously they hadn’t.
POSSIBLE SOLUTIONS The restriction on finance charges only applies to personal tax, it does not apply to company tax. The Wear & Tear Allowance applies across both taxes.
Corporation tax is falling to a rate lower than the current basic rate of income tax and there is speculation that following the Brexit referendum result it will drop even further.
Thus, rental profits earned by a
company will benefit for more reliefs than individuals and will be taxed at lower rates. However, there could be further tax liabilities if income is extracted from the company.
Companies pay Capital Gains Tax (CGT) at different rates than individuals, they benefit from indexation but don’t receive annual CGT exemptions. Additionally there may be further tax liabilities if gains are extracted from the company.
Should you decide to move your existing property portfolio into a company structure a stamp duty liability may arise, the use of partnerships may mitigate this, however care should be taken so that anti avoidance provisions do not apply.
In summary, the changes will give rise to additional tax for the majority of new and existing landlords, there may be opportunities to reduce this exposure however professional advice should be sought so that the cost benefit analysis can be fully explored. If any of the points noted above affect you or somebody you know please speak to Robert Barr for independent professional advice. •
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