Restriction of finance costs
Where an individual rents out residential property, in computing rental profits, the amount incurred on finance costs that can be deducted will be limited from 6 April 2017. ‘Finance costs’ essentially refers to mortgage interest and associated fees in taking out a loan to acquire a property. Ultimately, the deduction will only be at the basic rate of tax. This will be introduced as follows:
– for 2017/18, 75% of the total cost will be deductible in full, whilst 25% can only be deducted to provide relief at the basic rate of tax;
– for 2018/19, the ratio will be 50%/50%;
– for 2019/20, this will reduce to 25%/75%;
– from 2020/21 onwards, all finance costs will only provide relief at the basic rate of tax.
It should be noted that the excess of finance costs not deducted can be carried forward to future years.
The purpose behind this policy is ultimately to get more people out of rented accommodation and on the housing ladder by making buy-to-lets less attractive.
Stamp Duty Land Tax (SDLT)
For completions made from 6 April 2016, the purchase of a residential dwelling by those that already own at least one such property is subject to an additional 3% SDLT on the rate already applying. This applies to individuals and companies.
This has had the impact of many trying to purchase properties before 6 April to avoid the extra SDLT. However, this has no doubt increased the purchase price; likewise, it is hoped that the decrease in potential purchasers after 6 April will lead to house prices decreasing, thereby reducing the impact of the additional 3%.
Wear and tear allowance
From 6 April 2016, wear and tear allowance is no longer available. A new relief will be introduced whereby the cost of replacing furnishings will be deductible.
Whilst the basic rate and higher rate of CGT have been reduced from 18% to 10% and 28% to 20% respectively, this will not apply to the sale of residential properties, unless principal private residence relief applies.
Property investment businesses have not been treated in the same favourable manner as other businesses for several years. They do not get the same tax reliefs as trades: entrepreneurs’ relief, holdover relief, etc are all unavailable, whilst it is very difficult to obtain business property relief to avoid inheritance tax arising on property investment businesses. The current rules generally extend this unfavourable treatment.
However, there is a lot of scope for saving tax by holding properties in a company:
– the ability to contribute to pensions;
– the greater returns and therefore larger amounts to reinvest as a result of the lower rate of tax on rental profits and the availability of indexation allowance;
– the use of alphabet shares to decrease inheritance tax.
Note, care should be taken here as therey may be SDLT and CGT implications of transferring properties into companies.