Making Tax Digital for Landlords

Much has been said about HM Revenue & Customs’ (HMRC) plans to bring the way they collect tax information up to date by embracing technology. The changes, referred to as Making Tax Digital, are being billed by HMRC as a “digital revolution” that will “transform the experience of millions of taxpayers”.

The changes will come into force for many from April 2018, and those affected should be taking action now. The difficulty is that HMRC have yet to announce exactly what will be required under the new regime.

What HMRC have been doing is consulting with taxpayers and the accounting industry on how Making Tax Digital will operate. We have engaged in this process by responding to the HMRC consultations, which raised over 100 questions on the subject.

One thing that has become clear from this process is that landlords in particular will need to be prepared for big changes.

For years, HMRC have been telling landlords that the letting of property does not qualify as a “business”, thereby preventing them from claiming certain types of tax reliefs. For the purposes of Making Tax Digital however, not only will owning a rental property be seen as a “business”, but it will most likely place landlords among the first people required to comply with the new rules.

This will come as a surprise to many, particularly those who let their property through an agent and have little involvement in the day-to-day management.

Specialist software may also be required to make submissions and purchasing this may be an unjustifiable expense for those with smaller lettings. Free software may become available nearer the time.

These points formed a part of our substantial response to HMRC and we hope they take on board the message we, and the industry as a whole, have made.

If you have any concerns or would like to discuss any of the issues raised in more detail, please contact Hannah Farmborough or call on 0207 429 4147 to be put in contact with a member of our Construction & Real Estate team.

This article originally appeared on the blog of our member firm, Larking Gowen.

ATED – The 1 April 2017 Property Revaluation is Coming Up

The Annual Tax on Enveloped Dwellings (ATED) was introduced by the Finance Act 2013. The ATED is an annual charge, which was originally applied to residential properties with a market value in excess of £2m on 1 April 2012 (or date acquired if later), that was held by a company, collective investment scheme, or partnership where at least one of the partners is a company or collective investment scheme. Since its introduction we have seen the limit drop, reaching its current level of £500,000 on 1 April 2016.

While there are a number of reliefs that eliminate the ATED charge, such as where the property is exploited as part of a property rental business or properties held for charitable purposes, those that do not qualify for a relief or have been exempt from ATED on the grounds that the property was of low value, may need to concern themselves with the revaluation due to take place on 1 April 2017.

To date, the value of the interest in the property which is taken into account is generally its market value at the later of 1 April 2012 and the date on which the owner acquired the interest. However, the rules dictate that the 1 April 2012 values would need to be revalued every five years. The first revaluation for properties which have not been sold in the interim will therefore be on 1 April 2017.

While the new valuation does not need to be inserted onto the return until the period beginning on 1 April 2018, it is easier to consider the 1 April 2017 valuation at that point rather than at the later date where the valuation is used.

You can work out the value yourself or you can use a professional such as an estate agent, surveyor or other professional. Valuations must be on an open-market willing buyer, willing seller basis and be a specific amount. An undervaluation resulting in an underpayment of tax may result in interest and penalties, as well as a demand for the tax shortfall.

When considering if the ATED charge is going to be an issue for you, or dismissing it immediately, consider:

  • That where your property was previously outside the scope of ATED due to the value being too low, could a revaluation cause you to breach the threshold?
  • While there is no indication that the threshold could reduce further, be aware that based on past trends, it is a possibility and could leave you further in the scope of an ATED charge if you do not qualify for a relief.

For advice on investing in or disposing of residential property or assistance with filing your ATED return, please contact Hannah Farmborough or call on 0207 429 4147 to be put in contact with a member of our Construction & Real Estate team.

This article originally appeared on the blog of our member firm, MHA MacIntyre Hudson.

Buy-to-Let – Some Good News for a Change

The recent taxation changes regarding buy-to-let property have not been favourable. There has been the introduction of the additional 3% Stamp Duty Land Tax on acquiring a second property and the significant reduction in capital gains tax rates announced in the 2016 Budget did not apply to residential property which make both buying and selling a buy-to-let more expensive. In addition, the change over the next four years which will result in mortgage interest relief as an expense being abolished and replaced with a 20% tax credit will start to make the annual return on buy-to-let properties that little bit lower for many and may in some circumstances, mean that the tax liability on that source of income outweigh the net income itself.

However, it seems that the buy-to-let market continues to be a competitive one and many are still favouring investing in bricks and mortar. Lenders have worked to keep the market alive following the former Chancellor’s changes. Five years ago, the average rate for a two year fixed was just over 5%, but now there are deals available that provide the same term length but with a rate that is less than 2%. With the recent reduction in Bank of England Base rate to 0.25%, these rates may reduce even further. The rates for Companies are not so competitive or products readily available, but with this becoming a vehicle that some investors are considering, this may change too in time.

If you have any queries about anything raised in this article or to be put in contact with a member of our Construction & Real Estate team, please contact Hannah Farmborough or call on 0207 429 4147.

This article originally appeared on the blog of our member firm, Larking Gowen.

Changes to the Taxation of Let Properties

Interest Relief on Let Properties

As you may be aware from 6 April 2017 HMRC are making changes to the relief you can receive for any finance costs you incur in the letting of your property. Finance costs include mortgage interest, interest on loans to buy furnishings and fees incurred when taking out or repaying mortgages or loans. As previously, no relief is available for capital repayments of a mortgage or a loan.

Please note these rules only relate to residential properties held in personal ownership and not commercial properties. Although no indication has been given by HMRC, we anticipate that the changes will also apply to properties held in trust.

Currently you are able to deduct all of your finance costs from your property income when calculating the taxable profits. Higher rate taxpayers therefore receive 40% tax relief on any finance costs incurred.

From 6 April 2017 you will not be able to deduct the finance costs from your property income in calculating the taxable profits. You will instead receive a reduction against your overall tax liability of 20% of the lower of:

  • the finance costs,
  • profits of the let property in the year, or
  • total income (excluding savings and dividends) that exceed the personal allowance.

If you are a basic rate taxpayer this should not affect your tax position, however if you are a higher rate taxpayer the amount of tax relief you now receive on these costs will be halved. This restriction will be introduced gradually over the next four years.

There is over a year before these rules are introduced, this gives us plenty of time to look at any planning opportunities for you.

For example:

  • If you will be re-mortgaging in 2017, perhaps this could be looked at prior to the changes to ensure maximum relief is obtained on the arrangement fees;
  • If you have a number of loans on various properties let or not, ensuring these are restructured in the most tax efficient manner; or
  • Reviewing the way in which you own the property/ properties.

Other Changes to Property Taxation

From 6 April 2016 there are also a number of other changes which may affect your taxable profits. If you rent a room in your house as long as this does not exceed £4,250 before expenses this will not be taxable. From 6 April 2016 this is being increased to £7,500 per annum.

If you let a fully furnished property you are currently allowed to claim a 10% wear and tear allowance but not the original cost or the actual cost of replacing the furniture. From 6 April 2016 wear and tear allowance will be abolished and you will be allowed to claim a deduction for the actual cost of replacing furnishings, this applies whether the property is let furnished, part furnished or unfurnished. No deduction will still be allowed for the original cost of the furnishings.

Relief will be available on the replacement of items, such as:

  • Movable furniture or furnishings, such as beds or sofas,
  • Televisions,
  • Fridges and freezers,
  • Carpets and floor coverings,
  • Curtains,
  • Linen,
  • Crockery or cutlery.

If you feel that you could benefit from some planning advice on your rental property/properties prior to these changes being introduced, please contact Hannah Farmborough or call on 0207 429 4147 to be put in contact with your local representative.

Solid start to 2016 for the construction industry

With the announcement that the UK construction’s purchasing manager’s index (PMI) increased to an unanticipated 57.8 in December 2015, the sector begins 2016 on an encouraging note.

The figure shook off the seven month low of 55.3, exceeding the forecast of 56 expected by market analysts and now sits more comfortably above the 50 mark which represents sector expansion. Growth was attributed to a rise in commercial construction activity as a result of improvements in economic conditions with housing activity also seeing a rebound after a 29 month low in November.

In contrast to the strong performances in commercial and housing activity, civil engineering has seen a marginal drop after seven months of sustained growth. However, Tim Moore, senior economist at Markit adds that ‘”civil engineering activity looks set to experience a near-term spike at the turn of 2016 from spending related to flood relief and additional capital budgets.”

Overall the results indicate that the sector is set for a positive year with continued growth which is reflected in the industry’s optimistic outlook. The Markit/CIPS survey revealed that just over half of firms anticipate a rise in business activity during 2016 with only seven per cent expecting a decline. A part of the sector confidence is expected to be as a result of the devastating damage caused to thousands of homes, infrastructure and other buildings due to recent UK flooding. Larger client budgets, economic growth and a healthy pipeline of new projects are also providing optimism among builders.

Mark Robinson, chief executive of public sector procurement organisation Scape, comments that the government commitment in the Autumn Statement to provide a £12 billion fund to infrastructure and build new homes provides a positive boost. He adds “the stage has been set for a strong year in the construction sector, with confidence and robust new business volumes forming the bedrock for continued growth in 2016.”

If you would like to speak with a member of our Construction & Real Estate team, please contact Hannah Farmborough or call on 0207 429 4147 to be put in contact with your local representative.

Changes to ATED deadlines – ensure you remain compliant

Although in recent years we have been used to the Annual Tax on Enveloped Dwellings (ATED) cycle being in April, this year property owners have more than one deadline to contend with to remain ATED compliant.

Properties between £1,000,000 and £2,000,000

Properties in the £1-£2m price bracket held by an envelope (owned by a company, a partnership with a corporate member or other collective investment vehicle) will have to file their ATED return by the 1 October 2015. Any ATED tax liabilities will be due to be paid by 31 October 2015. This extended deadline for this price bracket is strictly for transitional purposes and for this year. For all future years, the deadline for both the annual return and any tax due will be 30 April.

For the avoidance of doubt, properties worth over £2m would have needed to file their ATED return by 30 April 2015.

Relief Declaration Return (RDR)

As highlighted in April, if you qualify for an ATED relief (for example you hold the property in an envelope and rent it out to a third party) there are changes to the way the compliance will operate. This has also led to a transitional deadline (1 October 2015) for filing the new RDR. Once again, the new deadline is for this year only and ‘normal service’ will resume next year with the ATED return dates being 30 April 2016.

Whilst the deadline is looming, HMRC have still not released the RDR form that needs to be submitted so currently this Return still cannot be made.

Whilst the timescales are short, it is important to remember that missing any of the deadlines will lead to automatic penalties being levied, even if you qualify for a relief!

2016

From the 1 April 2016, enveloped properties worth £500,000 or more will fall within the ATED regime. Although we have no confirmation yet whether there will be similar transitional dates (1 October) for this bracket, if you have a property which is worth circa £500,000, it is important to consider your position under ATED.

Buy To Let Property Owners – The 2015 Summer Budget Tax Relief Changes that Will Affect You

In a budget that took most by surprise, there were significant changes for the Buy to Let (BTL) market in George Osborne’s first Conservative only budget.

Wear and Tear Allowance Abolished

From 06 April 2016, furnished residential property owners will no longer be able to claim wear and tear allowance on their properties which has been a useful deduction for property owners that was not based on whether any investment had been put into the property. This allowance will now be replaced with a renewals system where relief is given only when furnishings are replaced in the premises.

Although final details have not been released (and it is unlikely we will have any finality before the Autumn Statement at the earliest) it does look likely from HMRC’s consultation that they will do away with worrying about how much or little a property needs to be furnished and instead will focus on straight relief relating to the replacement of furnishings, irrespective of whether the property is furnished.

If there is any intention to give a rented property a face lift with furnishings being bought, it is potentially sensible to consider deferring the expenditure until after 6 April 2016, as this will have no impact in the wear and tear relief you will be due for the year to 5 April 2016.

Interest Rates Set to Rise

Perhaps the biggest announcement in the budget which affected the BTL market were the restrictions on mortgage interest relief. Currently individual landlords receive tax relief at their highest rate of income tax on all of the interest they pay to finance their letting business.

From April 2017 the amount of interest that will be eligible for tax relief at the higher and additional rate (40% and 45%) will be restricted to the following:

• 75% of the interest paid in 2017/18

• 50% of the interest paid in 2018/19

• 25% of the interest paid in 2019/20

The balance of the interest will be eligible for 20% tax relief in each case and these new rules will only affect 40%/45% tax payers. From 6 April 2020, only basic rate tax relief will be available for interest for higher or additional rate tax payers. Property partnerships and members of Limited Liability Partnerships (‘LLPs’) are also caught by the new rules on a just and reasonable apportionment basis.

On the basis that you need the finance to continue, you may wish to ensure you have the most competitive rates available by remortgaging before the tax relief is reduced. You may also wish to consider the ownership of the property by putting it into joint names in order to maximise basic rate band relief.

Interestingly, there is no comparative restriction on interest deductions for companies which own investment assets. Although careful planning is essential to ensure no undue capital gains tax (CGT) or stamp duty land tax (SDLT) liabilities arise. If the rules currently remain, operating property rental business from companies will look ever more enticing.

If you would like to discuss this issue in more detail or you would like to speak with a member of our team, please contact Hannah Farmborough or call on 0207 429 4147 to be put in contact with your local representative.