The new tax changes for holding a rental property as an individual, or in a limited company, will need to be carefully considered by landlords.
- Allowable expenses – From 06 April 2016 (for individuals) and 01 April 2016 (for companies) landlords are able to claim allowable expense i.e the actual cost of replacing furniture ( such as tables, chairs, beds etc) and fittings ( such as carpets & curtains).
- Stamp duty – An additional 3% stamp duty land tax is payable for properties purchased on or after 1 April 2016. This is to apply to both individuals & Ltd companies.
- Interest payable on loans – Until 05 April 2017, all interest were claimed at 100% but from 06 April 2017 onwards a measure to restrict this claim was introduced. The measure will not affect companies renting out property, or individuals renting out commercial property or furnished holiday letting. The measure will affect residential property in the UK and elsewhere, as well as mortgage interest, interest on loans to buy furnishings and fees incurred taking out or repaying mortgages or loans. Landlords will no longer be able to deduct all of their finance costs from their property income to arrive at their property profits. They will instead receive a basic rate (20%) reduction from their income tax liability for their finance costs. Landlords will be able to obtain relief as follows:
4. Capital gains tax on sale of residential property – In the March 2016 Budget it was announced that the capital gains tax rates for individuals would be reduced. However this reduction would not apply to sales of residential property. However, private residence relief (of principal private residence relief) is still available as before.
Individuals are entitled to an annual tax-free allowance which is £11,100 for the year from 6 April 2016. It would seem that individuals selling shares in companies which own residential companies would be chargeable to capital gains tax at the lower rates shown above. Companies pay corporation tax on their gains at the corporation tax rate (which for the year from 1 April 2016 is 20%). Companies can claim indexation allowance to reduce the taxable gain whereas individuals cannot.
The above article highlights some of the main factors a landlord should consider. If you have any questions on the above then please feel free to contact us.