You may have heard of the changes, imposed by Section 24 of the Finance (no. 2) Act 2015, to restrict income tax relief for landlords on property finance costs to basic rate of tax. We sat down with Vision Consulting Chartered Accountants to provide you with all the information you need.
The changes are being phased in over 4 years, to soften the blow; therefore, they are actually already with us and have been since April 6th 2017. Unfortunately, landlords may only begin to realise the effect of this change when they prepare their Self-Assessment Tax Returns for 2017-18.
What are the changes?
Most landlords have finance against their investment properties and the finance costs are usually the largest deduction when computing the taxable property/rental profits that are included in the landlords Self-Assessment Tax Return and ultimately assessed to Income Tax based on the landlord’s margin rate of tax.
As of April 6th 2017, finance costs are no longer taken into account to work out taxable property/rental profits. Instead, once the Income Tax on property/rental profits and any other income sources has been assessed, the Income Tax liability will be reduced by a basic rate ‘tax reduction’. For most landlords, this will be the basic rate i.e. 20% of finance costs.
Finance costs include: interest on a mortgage, loans and overdrafts that have been incurred to fund the property acquisition, renovations, loans to buy furnishings for the property, arrangement fees and any other incidental costs for obtaining or repaying mortgages and loans.
Phasing in the restriction
The restriction was introduced on April 6th 2017 and will be fully implemented from April 6th 2020. The restriction works by continuing to allow the following percentage of finance costs as an allowable deduction when computing the landlord’s taxable property/rental profits, providing basic rate tax relief against the landlord’s resultant tax liability for disallowed percentage of finance costs.
| Tax year | Percentage of finance costs deductible from rental income | Percentage of basic rate tax reduction |
|---|---|---|
| 2017 to 2018 | 75% | 25% |
| 2018 to 2019 | 50% | 50% |
| 2019 to 2020 | 25% | 75% |
| 2020 to 2021 | 0% | 100% |
The above mechanism for calculating the taxable property/rental profits has the effect of potentially:
- Pushing basic rate taxpayers into higher rates
- Pushing higher rate taxpayers into the additional higher rates
- Pushing taxpayers over the golden taxable income of £100k whereby the taxpayer starts to lose their personal allowance and the effective rate of tax is 60%
Who will be affected?
If you exceed the basic tax rate and classify as a:
- UK resident individuals that let residential properties in the UK or overseas.
- Non-UK resident individual that lets residential properties in the UK.
- Individual who let such properties in partnership.
- Trustee or beneficiary of trusts liable for Income Tax on the property profits.
AND the residential property business incurs finance costs.
Who will not be affected:
- Those who fall into the categories above will not be affected if they remain as basic rate taxpayers, despite the changes.
- UK resident companies.
- Non-UK resident companies.
- Landlord of furnished holiday lettings.
- Commercial properties.
Non-Resident Landlord Additional Changes
In addition to the changes mentioned above, the government confirmed that non-resident corporate landlords would become subject to Corporation Tax from April 5th 2020, in respect of their UK property business income and gains.
The computational rules for Income Tax and Capital Gains are very different to the rules for Corporation Tax, including in the taxation of interest and the use of losses.
From April 2019, all disposals of UK properties (residential and commercial) will be within the charge to Non-Residents Capital Gains Tax. However, from 2020, companies will no longer file specific Non-Residents Capital Gains Tax returns (i.e. within 30 days of sale) but will instead report gains under normal self-assessment timelines.
As of 2020, non-resident landlords, including those already known to HMRC through registration under the Non-Resident Landlord Scheme, will need to register with HMRC for Corporation Tax and register their tax agents.
What can I do?
If certain conditions are met it may be possible to incorporate your property investment business into a limited company in exchange for shares in that company.
What are the benefits?
- Relief from Capital Gains Tax on the sale of the business to the company.
- The investment properties are uplifted to market value on the day of incorporation, thus increasing the strength of the Balance Sheet and the base cost of the properties for capital gains tax (under corporation tax rules) purposes.
- Potential relief from Stamp Duty Land Tax on sale of the business properties to the company.
- Full relief for finance costs in the company.
- Pay corporation tax at existing rates of 19% (scheduled to come down to 17% from 1 April 2020) on rental profits versus Income tax rates of 20% / 40% / 45%.
- IHT planning opportunities for shares in a company.
The Let Property Campaign
If you are a landlord and you haven’t declared your rental income to HMRC then ‘The Let Property Campaign’ is an opportunity for landlords to get up-to-date with their tax affairs and take advantage of the best possible terms.
If the information was deliberately kept from HMRC then the penalty will be higher than if the error was simply a mistake. In some cases no penalty is payable at all but if it is then it is likely to be lower than it would be if HMRC finds out first!
Talk to us
Lint Group will be holding a Landlord Tax Seminar where all your questions will be answered by a panel of industry experts.
To find out more, please contact us at abby@lintgroup.com or contact the marketing team on 020 7018 1990
