HMRC really seem to have had it in for landlords in recent years. For some it will be worthwhile to restructure their affairs in order to minimise the impact of recent legislation changes.
If you own a residential rental property that you are open to disposing of in the near future and which used to be your main home, then it may be worthwhile contacting us as soon as possible to see how much Capital Gains Tax could be saved if the sale was completed before 6 April 2020.
Currently when a residential rental property that used to be your only or main residence is disposed you may be entitled to Private Residence Relief (PRR) for the last 18 months of ownership and the period that this property was your main home. In addition, you would be entitled to a potentially restricted level of Lettings Relief for any period that the property was let out to a third party during your ownership.
However, it has recently been confirmed that proposed changes to the calculations of Chargeable Gains on the disposal of such properties will come into effect from 6 April 2020. This will mean that landlords will be entitled to a reduced 9 month deemed period of PRR and will no longer qualify for any Lettings Relief. These changes can lead to vast differences in the Capital Gains Tax due on disposal.
Finance Cost Restrictions
Landlords can no longer deduct all of their finance costs (e.g. mortgage interest) from their rental income. Instead a Basic Rate reduction is being phased in to reduce their Income tax liabilities. This reduction cannot be used to make a loss and can lead to such a difference in tax liabilities for Higher and Additional Rate taxpayers that in extreme cases rental portfolios that were once high-earning investments can become unprofitable.
Higher and Additional Rate taxpayers with significant finance costs, along with Basic Rate taxpayers who make rental profits before deduction of interest, may wish to consider approaching Friend & Grant to discuss potential solutions to their increased tax liabilities.
In 2018/19 50% of finance costs are allowable as an expense with 50% given as a Basic Rate tax reduction. This ratio will then become 25% expense : 75% Basic Rate reduction in 2019/20. Then from 2020/21, finance costs will only be relievable as a Basic Rate reduction.
There are potential solutions to help reduce the impact of these changes, such as:
- Transferring a portion of your entitlement to the rental income to a Basic Rate taxpayer (see below).
- Incorporation may be worthwhile for those with substantial rental portfolios (see below).
- Having the property managed by a limited company you own at a commercial rate.
- Reducing your property portfolio size.
- Selling residential property and reinvesting in commercial property.
- Converting your rentals into Furnished Holiday Lettings.
- Paying down the capital on the outstanding mortgage(s).
- Increasing your Basic Rate Band entitlement through personal pension contributions or gift-aided donations.
Reallocating Beneficial Entitlement to Rental Income
It may be worth considering altering the split of beneficial entitlement to rental income where Higher or Additional Rate taxpayers are married or jointly hold property with another that has less taxable income and has unutilised Personal Allowance, Basic Rate band, or Higher Rate Band.
If you think that you may benefit from this, then please feel free to approach us about discussing your options. This change may be better enacted through a legal deed and HMRC form or through the formation of a partnership, depending on the nature of the rental portfolio and the services provided to the tenants.
Those with particularly large and highly-geared existing rental portfolios may benefit from being taxed under the Corporation Tax regime rather than via the Personal Tax regime. If you are interested in exploring whether there could be tax savings to incorporating, then we would be happy to explore this for you.
If you are considering purchasing further rental properties we recommend you speak to us first as it may well be beneficial to use a corporate vehicle from the outset.
If you are interested in talking to us about the impact of these changes on your property portfolio contact Jan Friend.
The content of this blog is correct as at 6th September 2019