Tax changes ahoy!
We have seen over the last few years a multitude of tax changes affecting residential property businesses and I would like to take this opportunity to mention a few of the most significant new rules and how we at Uley Tax Services may be able to assist.
Finance cost restriction
The way that mortgage and loan interest is set off against residential property rental income for tax is changing. Such interest will no longer be deducted from profits before calculating tax but will be treated as reducing the tax bill calculated before the deduction of interest. This tax reduction will be 20% of the interest expense. This means that landlords who pay higher rate tax will pay more tax.
The measure affects not only those who are currently higher rate taxpayers but also those who were previously basic rate taxpayers because the method of calculation increases the taxable income of those landlords who incur mortgage or loan interest. The result will be higher tax bills for many residential property landlords. The restriction does not apply in most cases to limited companies with property businesses nor to businesses that consist of furnished holiday lettings. We would be happy to discuss with you how these rules could affect your tax position.
Stamp duty land tax (SDLT) – higher rates on buy to let properties and the introduction of relief for first time buyers
Higher rates of SDLT were introduced from April 2016 and apply, with some exceptions, to purchases of second homes and buy to let residential properties. Where the higher rates apply the purchaser pays an additional 3% tax on the full purchase price of the property. The higher rates do not apply where at least part of the property is used for non-residential purposes at the date the purchase takes place. In that case the lower non-residential rates can apply.
On a slightly different note it is also possible to reduce SDLT on the purchase of property that includes more than one self-contained dwelling through a claim for multiple dwellings relief.
The government has also recently introduced relief from SDLT for first time buyers who purchase a single dwelling and the purchase price is no more than £500,000. The first £300,000 of the purchase price is taxed at 0% with the remainder being taxed at 5%. Where two are more individuals buy a dwelling jointly they must all be first time buyers for the exemption to apply.
SDLT has grown in complexity in recent times and we would be happy to discuss with you how the rules apply to particular purchases.
Expenditure on repairs to let property, which is revenue expenditure, is generally an allowable tax deduction from business profits. The treatment of capital expenditure on items of furnishings used in a property business, on the other hand, can vary.
Up to April 2016 if properties were let out fully furnished then a deduction of 10% of ‘net rents’, i.e. rents after council tax and water rates, was available to take account of the wear and tear to furnishings. This tax relief was then abolished and in its place property businesses may claim a tax deduction for the cost of replacing furnishings. This is known as the replacement of domestic items relief. However, the cost of initial fit out and that of improvements is not allowed for tax.
Furnished holiday lettings (FHLs) are treated differently. The replacement of domestic items relief is not available but FHL business may claim capital allowances for the cost of furnishing the property. The rules for deciding whether or not a property qualifies as a FHL are themselves intricate and care is needed to determine the correct tax treatment.
We would be happy to discuss with you the treatment of any capital expenditure that you are considering on your property business.
Happy to help
Please feel free to call us for a free and confidential discussion of any tax issues affecting your property tax business or any other tax queries you may have.
Richard Lewis, Uley Tax Services
Mob: 07837 229647