We would like to take this opportunity, as we delve further into 2017, to recap on some important tax changes for rental property upcoming this year in respect of residential properties.

Summary of some of the main changes being introduced by HMRC:

• Restrictions on mortgage interest relief for residential property and other costs before calculating your taxable profits. 
• A Stamp duty levy of 3% will be paid by all individuals and companies who purchase residential properties as a landlord. This applies for all properties over £40,000. In effect this adds 3% to your initial purchase price.
• Capital Gains Tax – from 2019 all CGT liabilities will have to be calculated and tax paid within 30 days of any sale. This is in line with the proposed introduction of the digital tax account system announced by HMRC.
• No changes to the main Stamp duty rates themselves.

Propert Tax Changes - Treatment of Interest

With effect from April 2017, the benefit of this deduction will be reduced and is being phased in over four years to ultimately only provide relief at the basic rate of income tax.

For example, a higher rate tax payer who has rental income of £100,000 and mortgage interest costs of £60,000 would pay £16,000 tax. Under the new rules, tax would be £28,000. An increase of £12,000.

Action Points to consider

• Make your cash work for you, instead of HMRC by switching interest only mortgages to capital repayment.
• Make full use of family allowances by reviewing ownership structure. N.B. assets can be transferred to spouses/civil partners on a no gain no loss basis.
• Consider new residential property acquisitions in a Limited Company structure.
• The ruling covers finance costs (e.g. arrangement fee’s, redemption fee’s etc.) as well interest and therefore the timing of debt restructure is vital. 

Property Tax Changes - Stamp Duty

As a recap here are the buy to let and commercial stamp duty thresholds:

Property value	Stamp duty rate for Buy to let (and/or second properties)	Stamp duty rate for Commercial (non residential)
Over £40k up to £125k / up to £150k	3%	0%
portion from £125k – £250k / £150k - £250k	5%	1%
portion from £250k – £925k / £250k – £500k	8%	3%
portion from £925k-£ 1.5M/ £500k or more	13%	4%
£1.5M or more	15%	4%

No duty is payable on any properties costing under £40,000.
 

A few exemptions

The higher rates will not apply to

• Purchases of caravans,
• Mobile homes or houseboats,

Action points to consider

• For commercial properties consider purchasing fixtures and fittings separately, thereby reducing the purchase price of the property itself and consequently the amount of SDLT payable.
• Exhaust all reliefs available including Multiple Dwellings Relief.
• Consider the possibility of using non residential rates of Stamp Duty.

Property Tax Changes - Capital Gains Tax

There have been a number of changes recently to the rates of capital gains tax such that matters can become a little confused as to the rate that can be used for any particular transaction. Therefore we believe it would be appropriate to summarise the rates of tax applicable and to indicate the various circumstances in which these rates will apply.

18% and 28% - Residential property

These two rates were previously the main rates of Capital Gains tax. Now they will only apply to any gains made on the disposal of residential property with effect from 6^th April 2016. 

The actual rate used is dependent on the level of income of the taxpayer in the tax year of disposal. If the taxpayer has any of the basic rate income tax band unused then that amount of any gain will be liable to tax at 18% with the remainder at 28%. 

To allay any fears you may have, the Main Domestic residence relief will still be available on the sale of a taxpayer’s main residence but clearly this rate will apply to anyone selling a second property, such as a holiday home or indeed can apply to the main residence if the circumstances are such that full relief is not available.

Furthermore this may be seen as an additional attack on buy to let landlords who, after the recently announced changes to interest relief (and SDLT on additional properties) may wish to dispose of properties within their portfolio to minimise the impact of these changes and thus triggering a capital gains tax charge.

Action Points to consider

• The timing of the sale is vital as individuals can have up to £11,100 worth of exempt gains per tax year.
• As assets can be transferred between spouses and civil partners at no gain, no loss making inter-spouse transfers may mitigate the liability.
• Review relevant reliefs for disposals such as incorporation relief or gift relief.

 As we have previously reported, the H M R & C business payment support helpline remains open for those who are unable to settle the full amount by the due date and wish to enter into an arrangement to settle the outstanding tax in instalments. 

We would reiterate H M Revenue & Customs continue to take a hard line approach such that reaching arrangements continues with difficulty. Requests are made by H M Revenue & Customs for cash flows and detailed explanations as to why funds were not put aside to settle tax liabilities particularly from their point of view, the profits in question had been earned some time prior to the due date for payment. Responding to the questions raised will require detailed up to date knowledge of the state of the business. Commercial considerations and current requirements can be cited in these circumstances as the reason the company is requesting a time to pay arrangement and increasingly H M Revenue & Customs wish to discuss the payment arrangements with taxpayers thus removing us as agents from the negotiation. If you are experiencing difficulties in making payment and wish to explore the various options available to you please contact Steve Sharp to discuss.

Here is a link to the invite for the LBW Spring Seminar which we hope you will be able to attend. You will have the opportunity to gain a further understanding of the upcoming changes as well as an opportunity to meet members of the LBW team who can assist in this area.

INVITATION TO PROPERTY TAX UPDATE 2017 

Last modified on Monday, 13 March 2017