Chris Williams looks at the changing tax landscape for residential landlords.
From 1 April 2016 an additional 3% stamp duty land tax will be charged on every residential property acquisition costing £40,000 or more, except where:
- the property is bought by an individual who does not own any other residential property;
- the property will be used as the buyer’s main residence and replaces another main residence sold in the 18 months before or after the purchase; or
- the buyer qualifies for exemption as a ‘large investor’ (this is not yet a certainty, but the Government is talking of exempting businesses that acquire 15 or more properties in a bulk transaction (or already own 15 or more)).
For higher rate taxpayers, there is also the looming spectre of the restriction on interest relief that comes into effect in stages from 6 April 2017.
Beware of the catch for joint owners and couples
Married couples and civil partnerships are to be treated as ‘single units’, so it won’t be possible for a husband to own the main residence and the wife own their holiday home, furnished holiday letting or buy-to-let. In fact, any form of joint ownership will be caught: if a property is bought by more than one individual, not just partnerships, the higher rate will apply if just one of the co-owners already owns another property. So for example, a parent buying a property jointly with a child means that the higher rate applies, even if it will be the child’s only property and main residence.
Tip for parents
If you’re helping a child to buy a home, don’t put legal ownership into shared names. Instead, get a lawyer to draft a private mortgage loan arrangement, so that the property is in the child’s ownership and the extra 3% SDLT won’t apply.
Why would you incorporate a property business?
There are good arguments for using a company to hold investment property:
- for higher rate taxpayers a big advantage will be full relief for interest, because companies’ interest relief will not be restricted;
- if you expect to buy and sell properties frequently the lower rate of tax on gains or 20% in a company, instead of 28% personal capital gains tax (CGT), can offer a saving. You won’t get any annual CGT exemption, but companies get indexation relief for inflation instead; and
- companies pay 20% corporation tax (CT) on their profits, so for profits that are to be retained for reinvestment there can be an extra 20% or 25% available to reinvest (21% or 26% from 2017 when the CT rate reduces to 19%).
But those arguments are countered by reasons not to incorporate:
- perhaps the biggest is the overall double charge on gains: 20% when gains are realised in the company and more tax when funds are withdrawn - between 7.5% on dividends to basic rate taxpayers and 38.1% if the additional rate applies, or 28% CGT on the cash or asset value representing the profit on sale or winding-up of the company;
- managing a company costs more in terms of accountancy;
- HMRC expect more in terms of reporting; and
- there is generally tax to pay if you incorporate an existing business, in the form of SDLT, possibly including the additional 3% from 6 April onwards (nb for CGT purposes, incorporation relief means you shouldn’t pay CGT if you incorporate the entire business).
Practical Tips:
- If you are going to incorporate an existing business, do it all in one go to make sure you get CGT incorporation relief.
- Try to ensure that the process is completed before April 2016 if possible, to be sure of not being caught by the higher SDLT rate.
- If you have both residential properties and furnished holiday lettings, don’t mix them both in the same company: furnished holiday lettings count as a trade but other residential properties do not, so a company holding both may not get entrepreneurs’ relief on a later disposal of the shares.
