Tax

Important changes on the taxation of residential property

Changing tax landscape: to avoid the housing market overheating during his period as Chancellor, George Osbourne introduced a raft of onerous changes to the tax treatment of buy-to-let (b2l) properties.

Why the need for change?

Tempted by the potential of a better return on their investment and the bonus of capital growth over the longer run and, in part, fuelled by cheap borrowing grey-haired-empty-nesters have enthusiastically embraced b2l market.

Unsurprisingly, fuelled by the growth in private landlords earlier in this decade the property market started to show signs of overheating in certain areas of the country, typically London and the South East.

I believe that it was these signs coupled with his successful introduction of a new tax on property commonly referred to as ATED (Annual Tax on Enveloped Dwellings) that prompted George Osborne to tighten the tax-regime around b2l.

Tax changes

The main tax-changes are across the three main heads-of-duty (tax) affecting property owners.  Namely income, capital gains and stamp duty land tax.

Stamp Duty Land Tax (SDLT)                                        

In his 2015 Autumn Statement Chancellor Osbourne announced the introduction of a new additional residential property rate SDLT, chargeable on all “additional residential property acquisitions” made by residential property owners who were not seeking to sell or otherwise dispose of their existing property.

The additional residential property rate charge came into effect on the 1 April 2016.

(*Except in the case of properties where exchange of contract took place by 26 November 2015 and completion was after 1 April 2016)

Those affected now incur an additional 3% SDLT charged levied on the entirety of the value of the additional residential property that they acquire at the same time being subjected to the normal SDLT charge.

Table to demonstrate the effect of the additional residential property rate.                                 

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According to the Daily Telegraph, after an initial faltering in the purchase of b2l properties at the time of the change the Treasury now looks set to benefit from a £700m SDLT windfall as buyers of additional property regained their enthusiasm for acquisitions in the final quarter of 2016.

Coming soon: Income Tax, interest relief restriction

This second change is potentially more serious as it will impact on landlords who borrow to fund their b2l-property activity.

(*Not applicable to owners of holiday-lets)

Over a four-year period starting April 2017 b2l many landlords will see a withdrawal of income tax relief at the higher, or additional, rate of tax on interest payments made in respect of their b2l properties.

The restriction is being phased as follows:

  • 2017/18 – relief at the higher rates of income tax will be limited to 75% of the interest incurred cost. The remaining 25% of interest costs will be relieved at only at the basic rate of tax
  • 2018/19 – 50% of the interest cost will receive only basic rate tax relief
  • 2019/20 – 75% of cost will receive only basic rate relief
  • 2020/21 – basic rate relief only on total interest cost

A person subject to higher rate tax with annual interest payments of £12,500 in respect of b2l properties will see their tax liability increase as follows:

£

2017/18                625.00

2018/19             1,250.00

2019/20             1,875.00

2020/12             2,500.00

With many b2l properties already failing to return more that 4% gross on the capital employed many landlords’ cash flow is already negative and that is before any income tax charge.  Once the changes have been implemented landlords cash flow is only going to tighten even more.

Capital gains tax

While not strictly an increase to the rate of tax incurred, from the start of the 2016/17 tax year there has been a divergence in the rates of CGT chargeable on residential properties that do not qualify for private residence relief (*and carried interest) (non-qualifying properties) when compared “other” chargeable capital gains.

In his post-election Summer 2015 Budget Osbourne announced the rates of Capital Gains Tax, 18% for gains to the basic rate tax limit and 28% for gains above, would be reduce to 10% and 20% respectively with effect of the start of the 2016/17 tax year.

However, the reduction was not extended to cover non-qualifying properties.  Leaving their taxable gains chargeable at 2015/16 rates.

Need to know more?

The above is merely an overview of what I consider to be the main changes in the land and property tax arena.  However, there are many more so why not enrol for my land and property webinar on the 23 March 2017.

Brian Palmer is the tax policy adviser for AAT.

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