By Kupesh Patel
Director
Elsby & Co
AFTER the previous Budgets, the general consensus seemed to be that this current government didn’t like private (residential) landlords/property investors very much.
The hike in stamp duty rates, abolishing the wear and tear allowance and the staggered introduction of the interest relief restriction created vocal unrest amongst property investors, faced with much larger tax bills. It seemed inevitable that the Chancellor would bring in further unfair tax legislation in the Spring Budget and it’s with great relief that we can report that there were no further changes. So what do we know so far? The changes from the 2015 Budget are as follows:
Stamp duty on additional homes – there is a ‘super stamp duty’ of an additional three per cent on top of the existing rates for those who already own a residential property and are purchasing another, in a bid to dissuade property investors from purchasing properties otherwise available to first time buyers.
Wear and tear allowance reform – in the past, landlords were able to make a 10 per cent deduction (of the rent received) as a general allowance for wear and tear of furniture. This was abolished and instead the rules now only allow you to claim for replacing furniture.
Interest relief restriction – on the face of it, the aim of this change is to restrict the tax relief an investor can claim on the mortgage/finance interest to just 20 per cent. This will be phased in over the next four tax years (commencing 6 April 2017) and resulting in (by 5 April 2021) a situation where a taxpayer will only be able to claim 20 per cent tax relief on finance costs. The obvious end scenario is that higher rate taxpayers will be worse off, with higher tax bills.
What most taxpayers won’t know is that the way in which taxable rental profits are calculated has also changed. Currently, you’re allowed to deduct the full interest cost from rental income to arrive at a taxable profit. Under the new rules, the interest costs are excluded and instead relief is offered as a ‘reducer’ against your tax liability. What this means is that your taxable income will appear to be higher than it is, which can have an impact on those who receive Child Benefit and on the Personal Allowance for higher rate taxpayers. From the calculations we have done for our clients, this will create a much higher tax liability increase than initially thought.
National Insurance contributions – rental property businesses have always been exempt from paying national insurance contributions on their rental profits (they were never classified as a business/trade) but this may change if HMRC now view rental businesses as a trade.
So what can be done about it? The most touted option is to move properties into limited companies, but this is fraught with more tax implications and sometimes isn’t the best option for some people. The best option is to give us a call and we can have a free, no obligation, chat about the above and your situation. To find out more, visit our website www.elsbyandco.co.uk