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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

Restricted interest

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

2017/18 75%

2018/19 50%

2019/20 25%

2020/21 nil

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.
Any unused tax credit is carried forward to be relieved against the tax payable on the property income in a future tax year. This restriction on finance charges will have the greatest impact on landlords who pay significant amounts of interest or other finance charges, and who may be pushed into the higher tax rates due to their increased taxable income

Restructure

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.
A sale and repurchase of properties, or a transfer into a company, is likely to generate a capital gain as the transfer is deemed to occur at market value. The gain will be taxed at 18% or 28% depending on the level of the landlord’s other income.

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.

Keeping records

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.

Need help please email julie@justdoproperty.co.uk 

Contact us to discuss your property tax issues

 

Buy to Let Tax Calculator

Telegraph Money has developed a buy-to-let tax calculator that gives an indication of how your profits be affected by the new tax over the next five years.

Click here to go to the Tax Calculator

 

 

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