The new tax changes for holding a rental property as an individual, or in a limited company, will need to be carefully considered by landlords.
These changes impact:
- allowable expenses
- stamp duty
- interest costs
- treatment of future gains.
Wear and tear allowance
This has been abolished for individuals from 6 April 2016 and for companies from 1 April 2016. In its place landlords are able to claim as an allowable expense the actual cost of replacing furniture (such as tables, chairs and beds) and fittings (such as carpets and curtains). You can see the draft clauses; Clause 69: Property business deductions: replacement of domestic items and Clause 70: Property business deductions: wear and tear allowance; in the Finance Bill (No2) 2016
Stamp duty payable on purchase of property
An additional 3% stamp duty land tax is payable for properties purchased on or after 1 April 2016. This is to apply to both individuals and limited companies. There are detailed rules for individuals and for purchases through limited companies.
The surcharge applies to residential properties but not to commercial properties.
Interest payable on loans relating to the business
This measure will restrict relief for finance costs on residential properties to the basic rate of income tax and will be introduced over four years from 6 April 2017.
The measure will not affect companies renting out property, or individuals renting out commercial property or furnished holiday letting.
The measure will affect residential property in the UK and elsewhere, as well as mortgage interest, interest on loans to buy furnishings and fees incurred taking out or repaying mortgages or loans.
Landlords will no longer be able to deduct all of their finance costs from their property income to arrive at their property profits. They will instead receive a basic rate reduction from their income tax liability for their finance costs.
Landlords will be able to obtain relief as follows:
Finance cost allowed in full Finance cost allowed at basic rate
Year to 5 April 2016 100% 0%
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%
Capital gains
In the March 2016 Budget it was announced that the capital gains tax rates for individuals would be reduced. However this reduction would not apply to sales of residential property. However, private residence relief (of principal private residence relief) is still available as before.
Basic Rate Higher or Additional
Taxpayer Rate Taxpayer
Rate on gains from residential property 18% 28%
Rate on gains from other assets 10% 20%
Individuals are entitled to an annual tax-free allowance which is £11,100 for the year from 6 April 2016. It would seem that individuals selling shares in companies which own residential companies would be chargeable to capital gains tax at the lower rates shown above.
Companies pay corporation tax on their gains at the corporation tax rate (which for the year from 1 April 2016 is 20%). Companies can claim indexation allowance to reduce the taxable gain whereas individuals cannot.
With regards to the reduction in rate of capital gains tax, you can see the draft clause and schedules: Clause 72 and Schedules 11 and 12: Reduction in rate of capital gains tax; in the Finance Bill (No2) 2016
Article from ACCA In Practice