Tax Tips for Residential Property Owners

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In the latest UK200Group blog, Paul Hawksley, TWP Accountants provides Tax Tips for Residential Property Owners.

Paul Hawksley
With the crashing waves of new tax rules introduced by the government in recent years, many property owners find themselves struggling to move forward with their tax affairs. This article looks to identify the legislative changes, raise awareness of what’s important and offer ideas on how to minimise future tax liabilities.

Income Tax
From 6 April 2016, wear and tear allowance claims as a deduction from residential property income were repealed. Instead, a landlord can now claim tax relief for the full cost of domestic items within the property (e.g. furniture and appliances). Unfortunately, this doesn’t include the initial cost of introducing an item to the property let, but any subsequent repairs to or replacement of the item may be claimed as a deductible expense. Now that a claim for exact costs is to be made rather than a blanket allowance, it is important that sufficient evidence of these costs is kept for your records. This will prove crucial under an enquiry by HM Revenue & Customs into your tax affairs.

A very warm welcome was given by UK landlords to the increased rent-a-room relief available from 6 April 2016. This new legislation provides an uplift of the relief from £4,250 to £7,500 per year, the first increase to this relief since 1997. The thought of receiving up to £625 tax-free per month has now made taking in a lodger that bit more appealing to some.

From April 2017, landlords will experience the introduced restrictions to tax relief for financial costs in relation to residential properties. In ‘year one’ only 75% of the costs incurred will be deductible from rental income, providing tax relief at the taxpayers marginal rate. The remaining 25% is disallowed with a 20% tax credit given in its place. By 2020/21, 100% of financial costs will be treated this way. For this reason, highly geared residential property businesses may find themselves with a tax bill far greater than their actual cash profit for the year – a menacing concern for many; but comparative tax computations for the years ahead, considerations of incorporation and a review of the business’ financing position will prove very useful in controlling these unscaled tax charges.

Are you a higher rate taxpayer, but your spouse/partner isn’t utilising their full personal allowance and basic rate tax band? If so, it may be beneficial to shift a share of your profit from property lettings into their name to reduce the collective rate of tax applicable to this income stream. To do so, you must assign a percentage of the beneficial interest into your spouse’s name, possible by way of a declaration of trust. It is important to remember that this alone is not sufficient. Form 17 must also be completed and submitted to HMRC within the appropriate timeframe in order for the new holding to be substantiated for tax purposes.

Capital Gains Tax (CGT)
When making a disposal of a capital asset, an individual is ordinarily entitled to an annual exemption (tax-free amount) before any remaining capital gains are subject to tax. Unfortunately residential properties were excluded from the reduced CGT rates of 10% and 20% applicable from 6 April 2017, therefore remaining taxable at 18% and 28%.

With the ‘no gain no loss’ treatment for transfers between spouses, the use of a declaration of trust reveals an additional benefit – the use of a second annual exemption (currently £11,300 for the 2017/18 tax year) and potentially a second band to capture the 18% tax rate, rather than 28%. Sometimes the most beneficial percentage to transfer to your spouse may not be a straightforward decision, but with the assistance of a professional firm you’ll find a solution to meet your needs and remain within the law.

As you may be aware, a taxpayer is not subject to capital gains tax on their own home or ‘main residence’. This is by virtue of the Principle Private Residence (PPR) relief available for periods of occupation. Providing PPR relief applies at any point during the period of ownership, the final 18 months of ownership will automatically be deemed as a qualifying PPR period, regardless of what the property is actually used for during that time. It is possible where an individual has more than one ‘home’ a main residence election may be made, therefore entitling that property to the PPR relief for the respective period the election applies to. Be sure the necessary measures are taken to ensure the main residence election stands true.

Where your PPR qualifying home has been let out at some point during its ownership, a secondary relief known as Letting Relief is available, on top of the above PPR relief claim. A full set of rules apply when calculating the available reliefs and care should be taken to ensure the greatest reductions to your capital gains are obtained.

Annual Tax on Enveloped Dwellings (ATED)
ATED was first introduced in April 2013 against high-value residential properties (dwellings) situated in the UK, worth more than £2million and beneficially owned by “Non-natural persons” (NNPs) namely, companies, corporate partnerships and certain investment vehicles.

From 1 April 2016 the scope of ATED widened significantly, bringing into charge dwellings which held a value of more than £500,000. The assessment date of a dwelling’s value is ordinarily based as at 1 April 2012 or the date of acquisition if later and further details on applicable charges, reliefs available and filing and payment deadlines can be found here

Stamp Duty Land Tax
You would think the list of changes above was enough for residential property owners to handle; however, the government also introduced increased Stamp Duty Land Tax (SDLT) rates for individuals wishing to acquire a second residential property in the UK. From 6 April 2016 an additional 3% charge is applied as a supplement to the already existing rates when a second property is acquired by an individual.

In comparison, a second dwelling purchased for £350,000 by an individual would incur an additional £10,500 of Stamp Duty Land Tax, than if that property was the individual’s first dwelling in the UK.

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