Landlords have had a rough ride in recent Budgets. Do they have any reason to smile this time?
Since the changes in the residential property taxation, landlords were badly hit with additional stamp duty and interest claim restrictions and so on.
Higher stamp duty land tax (SDLT)
Since 1 April 2016 landlords have to pay an extra 3% in Stamp Duty Land Tax if they are buying an additional residential property. This means a house of worth £300,000 does cost an additional SDLT of £9,000 as compared to what was payable before 1 April 2016. HMRC SDLT calculator can be used before purchasing any residential property to calculate the SDLT payable.
Finance cost restrictions
Since 6 April 2017, landlords are no longer able to deduct all of their finance costs from their property income to arrive at their property profits. Instead they receive a basic rate reduction from their income tax liability for their finance costs.
Landlords are able to obtain relief as follows:
Finance cost allowed Finance cost allowed
in full at basic rate
Year to 5 April 2017 100% 0% Year to 5 April 2018 75% 25% Year to 5 April 2019 50% 50% Year to 5 April 2020 25% 75% Year to 5 April 2021 0% 100%.
Finance costs include mortgage interest, interest on loans to buy furnishings and fees incurred when taking out or repaying mortgages or loans. No relief is available for capital repayments of a mortgage or loan. You may find these examples useful for understanding how do these changes impact on your clients’ tax position.
The following won’t be affected by the introduction of the finance cost restriction:
UK resident companies
non-UK resident companies
landlords of furnished holiday lettings.
This rate restriction pushes more landlords into the higher rates of tax and make the renting properties business uneconomical.
Capital gain tax (CGT)
From 6 April 2016, capital gain tax rates have been reduced to 10% and 20% for individuals. However CGT payable on residential property and carried interest is still 18% and 28%, so the reduction does not benefit at all for the gains made on the disposal of residential properties.
For UK residents, there is another change in for payments of CGT for disposals made on or after 6 April 2020.
The general rule will be that a return in respect of the disposal must be delivered to HMRC within a ‘payment window’ of 30 days following the completion of the disposal, and a payment on account made at the same time.
This is similar to the current system of stamp duty land tax payments, when a property is acquired. The self-assessed calculation of the amount payable on account takes into consideration unused losses brought forward or in the same tax year and the person’s annual exempt amount. Whereas any anticipated losses on future disposals cannot be taken into account. The rate of tax for individuals is determined after making a reasonable estimate of the amount of taxable income for the year.
Since 2013, councils were given powers to charge a 50% premium on Council Tax bills on long term empty homes and vast majority of councils currently apply a 50% premium on long-term empty homes. The Rating (Property in Common Occupation) and Council Tax (Empty Dwellings) Bill 2017-19 is in the process of getting Royal Assent. It is anticipated that councils will be able to charge 100% premiums from April 2019, 200% premiums from April 2020 and 300% premiums from 2021. The current states of the bill can be seen on parliament.uk
Business property relief (BPR)
Business property relief provides relief from inheritance tax (IHT) on the transfer of relevant business assets as highlighted in section 105 of IHTA 1984. However, if a business which only generates investment income will not attract BPR, so a residential or commercial property letting business is not eligible to claim this relief.
Another point to consider is the investments in real estate might provide a good appreciation over a period of time but it is not liquid cash which is easily available for its disposal if a need arrives.
Access to properties for broadband
The Department for Digital, Culture, Media and Sport is seeking views on proposals to make it easier for commercial and residential tenants to access high quality and reliable broadband. On 29 October 2018, it has launched a consultation for the following proposals:
amending the Electronic Communications Code to place an obligation on landlords to facilitate the deployment of digital infrastructure when they receive a request from their tenants
enabling communications providers to use magistrates courts to gain entry to properties where a landlord fails to respond to requests for improved or new digital infrastructure.
Landlords can participate in this consultation before 21 December 2018.