Property Tax

The number of people buying properties in areas where prices are rising rapidly, and selling them on quickly, has reached their highest level in a decade.  According to a recent report based on Land Registry data, in the year ended 31 March 2017, 30,822 houses and flats worth £5.5bn were bought and sold more than once in the year.

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Property Tax

Tax news for property investors and speculators

Stamp Duty

It has been well advertised from April 2017, anyone buying a second home or a buy-to-let property must pay a 3% stamp duty surcharge on any purchase over £40,000.  The increase is significant when put into practice – stamp duty on a £275,000 buy-to-let purchase would now be £12,000 instead of £3,750.

One way smaller property developers might try to get round this is by planning to briefly occupy the property then claiming the benefit of the main residence exemption when selling at a gain. However, even staying in the property say whilst carrying out renovation work, is unlikely to be viewed by HMRC as a reason to grant the exemption.

For those with buy-to-let properties, the wear and tear allowance which allowed a 10% deduction from rental income without the need for proof of work being carried out, has also been scrapped.

Furthermore, unlike other forms of investment, property sellers will not benefit from a lower rate of capital gains tax, which fell from 18% at the basic rate to 10% in April 2017.  Exemption may be available for the odd purchases and sales but if this continues year after year, HMRC may contend that the activity amounts to trading and insist profits are chargeable to income tax.

Mortgage Interest Tax Relief

Historically, you would be able to offset the cost of your mortgage interest against rental income in order to calculate your profit and tax liability.

However, in April 2017 the government began to implement changes which restrict the amount of mortgage interest relief available to investors.

For a practical example of how these changes will affect buy-to-let landlord once the tax relief has been completely disallowed in 2020/21 see below.

Before reduction in mortgage interest relief

Rental income                                                                                         10,000
Mortgage Interest costs                                                                        (4,000)
Other costs                                                                                              (1,000)

Taxable Profit                                                                                        5,000

Tax liability
For a Basic Rate tax payer (20%)                                                         £1,000
Tax liability for higher rate (40%)                                                        £2,000

How the changes will affect you in 2020/21 onwards

Rental income                                                                                         10,000
Mortgage Interest costs of £4000 no longer deductible                        -
Other costs                                                                                              (1,000)

Taxable profit                                                                                          9,000

Tax Liability  for Marginal Rate (20%)
For a Basic Rate Payer (20% x £9000 profit)                                        1,800    
Less 20% Tax credit (20% x £4000 mortgage interest)                      (£800)    
Tax to pay                                                                                                £1,000 = No difference

Tax Liability for Higher Rate (40%)                                                   £3,600        
Less 20% Tax credit (20% x £4000 mortgage interest)                       (£800)
Total tax to pay                                                                                      £2,800 = 40% increase in tax liability

The changes are leading many investors to reconsider how they hold their existing portfolios, structure property transactions and finance future acquisitions.

One strategy is to buy investment property through a limited company, this enables the investor to continue to claim the mortgage interest as a business expense.

Operating a business in this way can also provide more flexibility for extracting profits from the business and increase legal protection for the owner.

However, there are disadvantages, one in particular being the affordability of mortgages as companies often pay a  higher interest rate and another being the potential liability for higher capital gains tax in the future.

As with all major investment decisions, the most appropriate course of action will depend on your individual circumstances, retirement plans and financial goals.

Find more information and useful tax planning guides at our property accountants page.

If you are interested in becoming a client of Morris Crocker, contact us on 02392 484356. You can also use the request a quote form at the top of this page.


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Property & Construction Key Contact

Kevin Gilbert, Director

Kevin joined Morris Crocker in 1981 and throughout his career has specialised in the property development, investment and construction sectors. He has acted for all sizes of businesses, from individuals through to public companies.  His particular interest and expertise is in tax mitigation.

T:023 9248 4356


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