Tax Planning for Residential Landlords

We are starting to see the impact of the restriction of tax relief for interest paid by residential property investors that are being phased in over three years which started 6 April 2017.

For some investors, the tax involved can be quite significant but there are some actions that might be taken to mitigate this.

For married couples and those in a civil partnership, joint ownership might be considered. This is particularly attractive if one of the owners is not fully utilising their personal allowance and basic rate income tax band.

Transfers between couples living together in the year of transfer will not trigger capital gains. The change in ownership will however need to be documented. Properties can be held as joint tenants in which case the ownership will be deemed to be 50:50 unless this is altered by way of a declaration of trust. Alternatively, properties can be held as “tenants in common” reflecting the respective beneficial interests. In both cases a “Form 17” will need to be filed with HMRC in order to over-ride the usual 50:50 ownership assumption.

Transferring properties to limited company might be considered in some cases, although stamp duty and capital gains tax very often make this unattractive, unless the property ownership is effectively a business operated as a partnership. Companies are not affected by the interest relief restrictions.

For those already affected, if additional properties are acquired, it might be more tax efficient to buy them in a company.

The interest relief restrictions do not apply to furnished holiday lettings and some property investors are switching their buy to lets to take advantage of this. To qualify, properties must be available for letting for at least 210 days and actually let for 105 days, but for no more than 31 days to the same occupants in a tax year.

Sometimes it is possible to rearrange borrowings, particularly if the owners are involved in other businesses that have borrowings.

If a large number of properties are owned, a management company operated by the owners might be used to shelter some profit from higher personal tax rates.

If you are interested in discussing any of these matters in more detail please let us know.



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