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Property tax for residential landlords

Where are we now?

Mark Stemp, Partner, Private Clients
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Residential property investors have been the target of a number of the recent tax changes. In this article, we highlight the key areas that landlords need to be aware of.

Income Tax: restriction of loan interest relief

Landlords of residential property have been facing a restriction of relief on their costs of finance, including interest paid to the bank, from April 2017.

Prior to the change, landlords received relief at their marginal tax rates, typically 40% or 45%. The new rules mean, that from April 2020, relief is restricted to 20% of the interest paid. The rules are being phased in between 2017 and 2020 so landlords who are higher or additional rate taxpayers will start to see their tax liability increase.

The tax year 2017/18 is the first year of the restriction, many of whom would not yet have filed their tax returns or calculated their tax for the year.

Capital Gains Tax (CGT)

Profits arising on the sale of residential property remain liable to CGT at the rate of 28% for a higher rate taxpayer. This is in spite of other assets being charged to the lower CGT rate of 20%.

Landlords who had previously lived in the property are likely to be hit by the autumn budget 2018 proposals, where previously, after moving out of a property, they had a tax free period of 18 months. It is proposed to reduce this period to 9 months for sales after April 2020.

In addition, those who let out their properties previously lived in would have received lettings relief, capped at £40,000 each, or £80,000 for a couple. It is proposed this relief be changed to only be available to those who let to a tenant when they were also occupying the property.

Stamp Duty Land Tax (SDLT)

There is the additional 3% SDLT charged on top of the normal residential rates for the purchase of an additional residential property. The additional charge was introduced in April 2016. You won’t pay the higher SDLT rates if the property you’re buying is replacing your main residence.

Inheritance Tax (IHT)

UK IHT is charged on the value of an individual’s estate upon their death. While there are a number of reliefs for businesses, it is rare to see these reliefs apply to the landlord of a lettings business. Therefore, planning should be considered during the lifetime, including the tax implications of gifts to the next generation, trusts or companies.

Annual Tax on Enveloped Dwellings (ATED)

ATED is an annual charge that applies to high value residential properties held by ‘non-natural persons’ – typically this means companies. This charge now applies to properties with a value of at least £500,000.

Landlords letting the property on a commercial basis through a company may be eligible for a relief from the tax charge, although an ATED return still needs to be filed annually.

Corporation Tax (CT)

CT is chargeable on the profits of a letting business. The CT rate is currently 19%, although it is planned that the rate is to reduce to 17% from April 2020.

The restriction on loan interest relief which applies to income tax doesn’t apply to companies.

Incorporating property businesses

Running property businesses through companies, sometimes known as Family Investment Companies has been a key topic in the press recently. However, this is not always appropriate for landlords.

There are tax implications of transferring already owned property to a company including the SDLT and CGT costs to factor in to the cost/benefit analysis. As always tax and legal advice should be taken to account for each individual’s circumstances.

For more information of property tax for residential landlords please contact your usual Crowe contact.

Contact us

Mark Stemp
Mark Stemp
Partner, Private Clients
London & Thames Valley