Find out what’s happening in the property investment arena both in the UK and internationally
#TaxTuesday: Week 1- How the UK tax environment is changing
April 4, 2017Article by Paul Avery
Welcome to our new #TaxTuesday series, guiding you through property taxes for individuals and companies in bitesize weekly chunks.
What we’ll be talking about
Having laid out the latest challenges for UK buy-to-let and signposted a range of potential solutions in our Landlord Survival Guide, this series seeks to address specific tax issues in more depth and explore how to overcome them.
Probably the most talked about and least well-understood way to ease the tax burden on property investments is to set up a limited company. #TaxTuesday will give a broad introduction into the process of incorporating, as well as what advantages it offers, who stands to benefit, and some key things to watch out for.
What taxes affect property investors, and what has changed?
We kick off the series this week in honour of Thursday’s rollout of controversial changes to tax relief on mortgage interest payments. By way of an overview, here is a rogues’ gallery of the taxes that property investors can incur, and how they are changing.
Stamp duty: a single payment calculated as a percentage of the purchase price, set at tiered rates.
- As of April 2016, an additional 3% is due on the purchase of all second homes and investment properties.
Income tax: a proportion of your total income (including that from property), paid annually.
- Mortgage interest payments will no longer be subtracted from rental income when calculating taxable profit. This change will be phased in incrementally from Thursday 6th April 2017, when 25% of mortgage costs will be taxable. 50% will be taxable next year, and so on until 2020, when all mortgage costs will be taxable (minus a flat 20% credit). This can put serious pressure on the margins of higher-rate tax payers with big mortgages, though basic-rate tax payers and cash buyers may pay little or no extra tax.
- The ‘wear and tear’ allowance for upkeep and renovation costs amounted to a free tax credit worth 10% of rental income, whether refurbishment took place or not. As of April 2016, tax relief is available only on the cost of replacing items on a like-for-like basis. This is fairer but less generous, and involves more administrative effort.
Capital gains: a percentage of profit at sale, calculated according to the taxpayer’s income tax band.
- From 2019, this will be payable within 30 days of sale rather than at the end of the tax year.
Inheritance tax: 40% of any assets (including property) remaining when a person dies, above a threshold of £325,000.
- A new RNRB (residence nil rate band) will apply from April 2017 onwards. It provides an additional tax free allowance of £100,000 for deaths in 2017, rising by £25,000 each year until it peaks in 2020/21 at £175,000 per person. Thereafter it will rise in line with inflation. In effect, this means that the total tax-free threshold will be £500,000 from 2020 onwards. The additional allowance is subject to a couple of conditions that most property investors will meet. The estate must include a property worth more than the RNRB (£175,000), that the deceased must have lived in at some point, and which must be inherited by direct descendants in whole or in part. Some wealthier investors, however, may not qualify in full: the RNRB is tapered away if the estate exceeds £2,000,000 in total.
The tax environment was already tricky for landlords to navigate before waves of new rules rolled in over the past few years. Now things are potentially tougher, and temporarily more confusing, but the bottom line remains the same: diligent and well-informed investors will come out on top.
In subsequent weeks we will drill into these taxes in greater detail and discuss how buying property through a company might shelter investors from some of their harshest effects.
Disclaimer: Tax advice is never one-size-fits-all. The government takes all circumstances and applications on a case by case basis, and so should investors. For help assessing your individual situation, seek bespoke advice from qualified experts.
We partnered with tax expert James Hume of Steel Tax London to create this series. Steel Tax can be reached at 020 3291 1943, or through their website: http://www.steeltax.london. If you have any questions for us about the contents of #TaxTuesdays, feel free to drop me a line at firstname.lastname@example.org.