Jo White, Keston Reeves
At the start of 2017, now is a good time to reflect on several changes in taxation which affect owners of residential rental properties. Many of these changes have been in force since April 2016, so here is a refresher for you plus we look at the new changes coming in from 6 April 2017, so you still have time to review your personal tax position.
Higher Stamp Duty Land Tax (SDLT) rates
Since 1 April 2016, an additional 3% SDLT charge applies where an individual, joint purchaser, or company purchases an additional residential property costing over £40,000. Spouses or civil partners are treated as joint purchasers even if the additional property is bought individually. The additional charge won’t apply if you are replacing your main residence within 36 months of the sale but if the purchase occurs prior to the sale, then the additional charge is payable. However, a refund can then be claimed if the property is sold within this timeframe.
Capital Gains Tax (CGT) rates
Although CGT rates have fallen since 6 April 2016, for residential properties the rates remain at 18% or 28% (depending on the income tax band the gain falls within in).
Property repairs and renewals
Since 6 April 2016 the wear and tear allowance for furnished properties and the statutory renewals basis for furnished or unfurnished properties no longer apply, being replaced by the Replacement of Domestic Items (since 2016/17) rules.
‘Domestic items’ include furniture, household appliances and kitchenware which are not revenue in nature and so, without these rules, would obtain no relief on this expenditure. Fixtures (fixed plant and machinery) and central heating systems are not domestic items, but may obtain relief if they are being repaired.
The level of deduction available is the cost of a like-for-like replacement. Any cost for an improvement, or any sales proceeds must be taken off the allowable cost.
Finance Cost Restrictions
From 6 April 2017, landlords will not be able to deduct all their finance costs (mortgage interest, loan interest for furnishings purchases, repayment/ loan/ mortgage fees) from their property income; instead only receiving a basic rate deduction. This will not generate a tax refund but you can carry forward any unused finance costs to a future year.
This restriction is being phased in over 4 years, with 75% of finance costs allowed as a deduction in 2017/18, reducing to 0% by 2020/21. Further restrictions will apply if your total property income or total non-savings taxable income is lower than the finance costs incurred.
The new rules don’t apply to companies so it may be more attractive for landlords to own properties within a company structure. Plus, as corporation tax rates are lower than personal tax rates this could release more funds for re-investment. However, whether a company structure is right for you depends on your circumstances so it is more important than ever to review this position with a professional.