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Property and tax
Sarah Hamilton - June 17th, 2019
Over the past few years various changes have been made and are proposed for a wide range of tax issues arising from property ownership.
Some of the key changes are noted below:-
RESIDENTIAL PROPERTY
This is a valuable extension of the Nil Rate Band for Inheritance Tax (IHT) purposes which is being phased in over the four tax years to 2020/2021, by which time each person is potentially able to leave up to £500,000 IHT free. As with the ordinary Nil Rate Band, it is possible for any unused element of the RNRB to be transferred to the surviving spouse hence the magical “£1 Million IHT free per couple” heralded by certain politicians. However, the availability of the RNRB is subject to various criteria, including in a seemingly very inequitable way, only if a person’s estate includes their home and this home is left to their children or other direct descendants. There are some provisions to ensure that an individual who might lose some entitlement to RNRB because they have downsized can still qualify. RNRB is withdrawn on any estate where the gross value of the estate (before certain reliefs) exceeds the taper threshold of £2 Million.
The 3% additional rate of SDLT came into force from 1 April 2016. This applies to second homes and Buy to Let investments by individuals, and also applies to companies, so that the higher rate will apply on all purchases of residential property other than an individual’s main home.
Where a buyer pays higher rate SDLT on the purchase of a second residential property, they are permitted to reclaim the additional SDLT if the original main home is subsequently sold. The time limit for reclaiming the additional SDLT has been extended from 3 months after the sale to 12 months after the sale (Section 44 Finance Act 2019). However, the time limit allowed for paying SDLT and completing the SDLT Return forms has reduced from 30 days to 14 days from date of contract (this is applicable from 1 March 2019).
The additional SDLT does not apply if the annual tax on envelope dwellings (ATED) applies- this is a very expensive annual charge for valuable properties held by companies or partnerships, not rented out or occupied by employees of a trade.
Reliefs apply for farmhouses, let properties and in some other circumstances so that the charge does not apply BUT a return must be submitted by 30 April each year.
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Capital Gains Tax (CGT) – Private Residence Relief changes proposed for 2020.
Aspects of Private Residence Relief are under consultation at present namely:-
– at present, if a property has been an individual’s only or main residence at any point during their ownership, they are entitled under current rules to Private Residence Relief (PRR) for the last 18 months whether or not they occupy the property in that time. It is proposed to reduce the 18 months to 9 months. Not too long ago, the final period of exemption was 36 months.
– At present, letting relief applies so that when a property which has been a main residence is let out there is some dilution of the chargeable gain arising in the period when the property is not owner occupied. However, it is proposed that in future, letting relief will be amended so that it is only available when the property is also occupied by the owner (under the same rules as “rent-a-room”).
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Payment of Capital Gains Tax on Property Disposals.
From 6 April 2019, Capital Gains Tax due by non-residents on the sale of residential property in the UK is already subject to very tight reporting and payment deadlines whereby each gain must be reported on a new non-resident Capital Gains Tax Return and the tax paid within 30 days of the disposal.
Enabling legislation is in hand suggesting that any disposal of UK land on which a residential property gain arises and is made on or after 6 April 2020 will come under the new regime. This will significantly accelerate payment of such Capital Gains Tax due (CGT) and effectively strip out the initial computation of gain from the Self-Assessment Tax Return system and make it a stand-alone report and payment although the final tax rate would not be known until the Tax Return is completed after the end of the tax year in which the gain ends. We could see the strange situation whereby CGT due on a property sold in June 2019 would be payable in January 2021. CGT on property sold in May 2020 would be due in June 2020.
The default position is that income from property held jointly by married couples and civil partners is normally treated as beneficially owned by the individuals in equal shares (that is split 50/50) for tax purposes.
For property income and gains to be assessed in unequal shares, not only do the individuals concerned have to own the property in unequal shares (through a legally drawn up arrangement such as a Deed of Trust) but also a Form 17 Declaration must be made jointly and submitted to HMRC with evidence that the legal split is not 50/50. Both partners have to confirm the uneven split.
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Buy to Let portfolios owned personally or via a company?
There are many factors to consider when making this decision and we would welcome the opportunity to discuss individual circumstances. A very broad summary of some of the advantages / disadvantages of using a company are summarised below:-
Benefits of owning property in a company
- Finance costs can still be deducted in full following the changes in April 2017. (see point below)
- Corporation Tax rates are significantly lower than the higher rates of Income Tax.
- Careful planning of extraction of profits via Dividends is potentially more tax efficient than income tax on rental profits as they arise.
- Transfers of ownership of shares in a Limited Company is less expensive from a Stamp Duty Land Tax point of view than when you buy property as an individual.
- Shares can be gifted in the company instead of gifting the actual properties themselves which can assist with tax planning.
We find that one of the most common reasons for running a Buy to Let business via a company is as a substitute for a pension and this can work effectively.
Disadvantages of owning property in a company
- The company does not have an annual allowance for Capital Gains Tax purposes.
- There is the potential for a double tax charge if a property is sold at a gain in a company and then the profits are extracted from the company.
- There are more administration costs in running a company than a private portfolio.
- Some lenders will charge a higher rate of interest for amounts advanced to a company.
It is very difficult to give a simple answer as to whether a company is beneficial to operate a rental business. If you are using all of the rental income as and when it arises and only hold or want to hold a few properties, it may not be viable to run a company.
If, however, you wish to build up a large portfolio and are possibly considering a Buy to Let Limited Company as a succession planning tool, a company could be a valuable solution.
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Expenses to claim against rental income
It is becoming increasingly complicated to determine what can and cannot be set against rents. We are always mindful of the changes and will seek to maximise the legitimate claims that can be made including in some situations Capital Allowance claims. We generally advise our clients to let us know of all expenditure incurred in connection with the property that is let out of whatever nature and then we will discuss with you how your expense claims can be maximised.
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Rent a Room
The tax free amount under Rent a Room rose from £4,250 to £7,500 per annum from April 2016. It was intended that Finance Act 2019 would make major changes (read this as restrictions) to the availability of Rent a Room relief but in the event, this has not been proceeded with.
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Restriction of Tax Relief on Interest in respect of domestic property
Since April 2017, tax relief on interest for landlords of residential properties is restricted so that by 2020 interest will not be an allowable deduction from the profits of the letting but will attract tax relief at 20% only. This change does not affect furnished holiday lettings.
COMMERCIAL PROPERTIES
- Structures and Building Allowance
Finance Act 2019 introduced a fixed 2% per annum allowance for qualifying expenditure on the construction of structures and buildings as part of Capital Allowances regulations for contracts placed on or after 29 October 2018. This is an important and potentially valuable allowance over the life of a building.
- Commercial Letting of Investment Properties
Fixtures in buildings which are commercially let often qualify as plant and machinery and attract an 18% per annum writing down allowance. However, certain expenditure is deemed to be integral features and qualify for a reduced rate of 8%. We are familiar with the long lists of assets which do and do not qualify as plant and machinery / integral features so please do contact us to discuss further if you are embarking on refurbishing buildings.
When entering into an acquisition of a commercial property, your solicitor should be mindful of the potential to claim allowances on an existing property where relevant agreement exists between the seller and buyer.
The UK has a complicated tax system and the tax regime applicable to property does not escape this complexity. Rules and exemptions are created and changed all too frequently.
We are here to help our clients navigate the changing rules. Please do contact us to discuss if you believe that any of the issues outlined above may be relevant to your circumstances.