Residential property businesses are the latest sector to come under the glare of HMRC with an amnesty to allow undeclared property business profits to be declared but also a focus on the level of tax bills paid by residential property landlords.
The perception of HMRC is that individuals should not be allowed to buy up properties with the assistance of current low interest rates and reduce the scope for first time buyers to enter the property market. As a result steps have been taken to restrict the tax relief available to residential property landlords.
From 6 April 2017 the residential rental business profits of individuals must be calculated without a deduction for interest payments and other finance costs. A separate, much restricted, tax relief is then calculated. The effect is intended to limit tax relief to the basic rate of 20% but if interest charges are significant, even basic rate taxpayer landlords may be significantly impacted. The changes will be phased in over a three year period and will be fully effective from 2020.
The rules are relevant to individuals, partnerships and limited liability partnerships but interestingly limited companies have been spared. Some landlords may look to operate through a limited company or transfer existing portfolios. There are Capital Gains Tax (CGT) and SDLT/LBTT considerations alongside the recent changes to dividend taxation. There is potential scope to relieve CGT on transfer of a property portfolio to a company if the activity amounts to a ‘business’, with the added bonus of tax free ‘rebasing’ of the property cost.
Commercial properties, including qualifying holiday lettings which have their own tax regime, are unaffected by the changes. For those involved in the holiday let market, the rules make achieving the letting day and other requirements to secure qualifying tax status more important than ever, to ensure interest paid remains allowable in calculating tax liabilities.
These changes will have a significant effect on the commercial and tax position of many residential property portfolios and landlords should start planning now for the impact on their own business from 2017 onwards.
Advice specific to circumstances should be taken and if you require assistance in connection with this or any other tax matter, please contact Mark Thompson at Rennie Welch on 01573 224391 or by email at mark.thompson@renniewelch.co.uk
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