THE last six months have not been a good time for individual landlords from a tax perspective. Using the July 2015 Budget, and then the autumn statement in December 2015, the government have launched an unexpected, unjustified, and unfair tax attack on the individual landlord.
Their justification has been that they want to free up residential property for first time buyers, but the likely, real result will be a tax hike on landlords, and higher rents on tenants as a result.
Importantly, the government’s level of misguidance is shown in the fact that their most significant change will only affect the poorer landlord with mortgages, not richer landlords without borrowings, or indeed corporate landlords.
So what have the Government done?
July 2015: Announced the gradual restriction (over the next four tax years) of tax relief on finance interest used against profits on residential property. Individual higher-rate taxpayer landlords will still be taxed at 40 per cent on their rental income, but will only receive tax relief of 20 per cent on mortgage interest. For those landlords with high borrowings on their rental properties, effective tax rates could be in excess of 90 per cent by 2019-20
July 2015: Announced the abolition of the Wear and Tear allowance on furnished residential lets with effect from April 2016. Currently, landlords of these properties can claim a standard tax deduction to cover expenditure on replacement furnishing. This simple and useful deduction is based on 10 per cent of rents received (with some possible adjustments)
December 2015: Announced a stamp duty hike of three per cent on top of the standard stamp duty on purchases of rental properties (in fact any additional residential property) from April 2016
December 2015: Announced that from 2019 onwards, Capital Gains Tax (CGT) on property sales would be payable within 30 days. (Under the current rules, any CGT due on the sale of property is payable by 31 January after the end of the tax year in which the sale occurred. Depending on the date of the sale, this can give you between nine months and 18 months to pay
March 2016: We had hoped that there would be some good news for residential Landlords in the March 2016 budget. There was ‘sort of’ good news in that there were no further attacks announced. However, the Chancellor’s dislike of residential landlords was shown yet again when he announced that his generous reductions in the rate of capital gains tax applied to everything except residential property!
It makes for bleak reading. As this much harsher tax climate takes shape, it is even more important that you get the right tax advice. Yes, in order to keep you tax compliant, but much more importantly to ensure that you suffer as little as possible from the changes above, and minimise your tax bill, retaining more wealth.
There are a number of ways we are helping clients in these areas:
Ensuring your intentions at all stages of investment are clear and documented. This can assist if HMRC ever challenge how your investments are taxed
Ensuring all available tax deductions are claimed. This can include looking at all areas of your property business, even finance restructuring
Ways of mitigating the effect of the withdrawal of the Wear and Tear allowance, and looking at alternative reliefs
Most importantly, mitigating the (possibly very significant) effect of the restriction of mortgage interest tax relief. This could include forming and using limited companies with your portfolio, splitting ownership, manipulating and updating borrowings, making pension contributions to change effective tax rates, and making further tax-deductible investment in your property business
Typically, we discuss each individual client’s case in depth. Projections would be made based on your current rental profits and future intentions, which would then allow us and you to make an informed decision on how best to tackle the government’s attack on your property business, however large or small.
We offer an initial consultation, without fee or obligation, which enables us to make an initial assessment with you, and help you understand how we could help.
Call Elsby and Co on Northampton 01604 678470, Market Harborough 01858 451997 or