A guide for individual landlords on the recent tax changes.
Whether you own one or 50 let properties, you need to be aware of the tax changes that have already started to take effect – and which will accelerate over the coming years
For periods before 6 April 2017, all the interest and finance charges relating to funding for a residential property business could be deducted in full from the rental income. From 2017/18, the financial costs which may be deducted from residential property income by individual landlords are restricted as follows:
Tax year Finance costs permitted
The landlord receives a tax credit equivalent to 20% of the lower of:
- finance costs not deducted from income
- income from the property business before interest
- total income exceeding allowances.
The restriction for deduction of finance charges only applies to landlords who let residential property and pay income tax on those profits. It does not apply if the property is commercially let as furnished holiday accommodation (FHL), or the landlord is a company.
To avoid this restriction, the property business could be restructured to:
- let the residential property so it qualifies as FHL
- sell the residential property and reinvest in commercial buildings
- transfer the residential property into a company the taxpayer controls.
Where an actively-managed property business is incorporated, the gain can be rolled into the value of the company’s shares – but this incorporation relief doesn’t apply in all circumstances.
Any loans attached to the property business must be transferred into the company as leaving the borrowing in the individual’s name would defeat the purpose of the restructuring.
When the company acquires the properties, stamp duty land tax (SDLT) or for Scottish properties land and buildings transaction tax will be due, including the 3% supplement. There are several reliefs from SDLT where multiple dwellings are acquired in one transaction, or the transaction consists of a mix of residential and commercial property.
Full relief from SDLT can apply where the transaction involves a partnership of connected individuals transferring the properties to a company they control, but this is rarely found in practice.
Landlords are required to keep records of income and expenses relating to their property business which complies with the same standards and accounting conventions as other businesses, known as generally
accepted accounting practice (GAAP).
Currently landlords are not permitted to use the cash basis, but the government has proposed that a form of cash basis should be available to landlords with turnover of up to £150,000. This change is being backdated after coming into force from 6 April 2017. Individual landlords will be able to opt out of using the cash basis. Companies, limited liability partnerships and partnerships which include a company as a member, won’t be permitted to use the cash basis.
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Buy to Let Tax Calculator
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