Posts Tagged ‘Property’

Buy to let property owners – time to start planning for tax changes

Wednesday, March 1st, 2017

Property business owners, particularly buy-to-let landlords, have been hit with a number of quite dramatic changes in their tax status. One of the most draconian is the gradual disallowance of tax relief for finance payments that starts April 2017.

 

We have highlighted this issue in past articles posted to this newsletter. In essence, from April 2017, finance charges will be progressively disallowed and replaced with a tax credit fixed at 20% of the cumulative charges disallowed.

 

The changes will have the most impact on landlords who have borrowed heavily to grow their property portfolio. Landlords affected will suffer a possible two-fold, and negative impact on their property business.

 

Firstly, if their present claims for mortgage interest and other finance charges are reducing the amount of higher rate tax they are required to pay, once the present changes are fully implemented by 2020, tax bills will increase as tax relief will be limited to the basic rate.

 

Secondly, if their present claims for mortgage interest and other finance charges are reducing their taxable property income, such that they pay no higher rate tax, when these charges are disallowed their taxable income will increase – possibly into the higher rate bands – and for the first time they may become higher rate tax payers. They will still get some relief for finance charges paid but only at the basic rate.

 

In both cases, the amount of cash generated, after tax, will reduce. If landlord’s occupancy rates fall, the loss of cash flow will be exaggerated by increased tax bills and investors may face tough choices.

 

Planning is absolutely key. If you feel you may be affected, and have not taken professional advice thus far, please call. We would be delighted to both quantify the effects on your property business cash flow and to offer strategic ideas to minimise the downside consequences.

Buy-to-let and the changing tax landscape

Monday, February 27th, 2017

Buy-to-let property owners have been singled out in recent budgets for some quite draconian tax changes.

One of the most pervasive starts 6 April 2017. From this date, tax relief for the cost of borrowing – predominately interest charges – will be progressively withdrawn and replaced with a basic rate tax credit.

Between now and the 6 April 2020 relief will be tapered as follows:

 

2017-18 The deduction of allowable finance costs will be restricted to 75%, with 25% being available as a basic rate income tax deduction.
2018-19 The deduction of allowable finance costs will be restricted to 50%, with 50% being available as a basic rate income tax deduction.
2019-20 The deduction of allowable finance costs will be restricted to 25%, with 75% being available as a basic rate income tax deduction.

 

A worked example: consider the case of Linda, who has a buy to let with an annual mortgage interest charge of £10,000. Up to April 2017 she will be able to deduct the full amount, £10,000, from her property income before she pays tax. Obviously, the higher her rate of income tax the more tax relief she will currently receive.

 

The table below sets out the effective loss of tax relief if Linda is a higher rate or additional rate taxpayer. If Linda only pays tax at the basic rate there is no change in her income tax position.

 

  2016-17 2017-18 2018-19 2019-20 2020-21
Finance cost allowed 10,000 7,500 5,000 2,500 0
If additional rate taxpayer:
Additional rate 45% relief 4,500 3,375 2,250 1,125 0
Basic rate deduction 0 500 1,000 1,500 2,000
Total tax relief 4,500 3,875 3,250 2,625 2,000
Net finance costs paid 5,500 6,125 6,750 7,375 8,000
If higher rate taxpayer:
Additional rate 40% relief 4,000 3,000 2,000 1,000 0
Basic rate deduction 0 500 1,000 1,500 2,000
Total tax relief 4,000 3,500 3,000 2,500 2,000
Net finance costs paid 6,000 6,500 7,000 7,500 8,000

 

Because the amount of tax relief is gradually reduced, from April 2017 to April 2020, the cash flow impact is progressively negative for higher rate or additional rate tax payers. In our example, if Linda is a higher rate taxpayer her net finance costs (after deduction of tax relief) increase from £6,000 in 2016-17, to £8,000 in 2020-21.

A further consequence of this change is that the rental income for tax purposes increases with no increase in rents: the finance costs are added back. In some circumstances this may mean that basic rate taxpayers become higher rate tax payers.

Buy-to-let property owners who have not yet considered how this change will affect their property business should set aside some time with their advisors as soon as possible. We would be delighted to help.

The Land Registrys free property alert service

Thursday, December 15th, 2016

This service helps people to detect fraudulent activity on their property by sending them email alerts when there is certain activity on the property being monitored, such as a mortgage being taken out against it. The recipient can then decide whether they think the activity is suspicious and act quickly if so. The alert email tells them who to contact should they be concerned. The following notes are part of a recent announcement on this issue on the gov.uk website.

Alasdair Lewis, Director of Legal Services, said:

Property is usually our most valuable asset so it’s important to protect it from the ever-increasing risk of fraud. Land Registry is doing all it can to detect and prevent fraud but no system can be 100 per cent fraud-proof, which is why we urge people to follow our advice about protecting themselves from property fraud, including signing up for Property Alert.

Property fraud

Property fraud is where fraudsters try to “steal” a property, most commonly by stealing the homeowner’s identity and selling or mortgaging the property without their knowledge. They then disappear with the money leaving the true owner to deal with the consequences.

Since 2009, Land Registry has stopped fraud on properties worth more than £92 million.

How Property Alert works

You can monitor up to 10 registered properties in England and Wales. You will receive email alerts when there is certain activity on the properties you are monitoring, such as an application to change the ownership details.

Although Property Alert won’t automatically stop fraud from happening, it’s a useful early warning of suspicious activity which the home-owner can investigate if they are suspicious.

Example of how Property Alert helped to prevent a fraud

A landlord was renting out a property in England while he lived overseas. He was aware that absent landlords are more at risk of property fraud and signed up to our free Property Alert service. When he received an alert email informing him of a mortgage application being made against his property worth over £300,000, he contacted our property fraud line immediately as he wasn’t expecting this. Using this intelligence, we investigated and discovered the fraud. We then prevented the application from being registered. His contact details were out of date, so we advised him to update them, which he did so that if we need to contact him in the future he will receive our emails or letters.

Most at risk

You’re more at risk if your property:

  • is rented out
  • is empty
  • is mortgage-free
  • isn’t registered with Land Registry

Other fraud protection measures

To help protect yourself against property fraud, make sure:

  • your property is registered. If you become an innocent victim of fraud and suffer financial loss as a consequence, you may be compensated. Properties most likely to be unregistered are those that haven’t changed hands or been mortgaged since 1990
  • Land Registry has up-to-date contact details so we can reach you easily. You can have up to three addresses in the register including an email address and/or an address abroad

You can find out more about this service at https://www.gov.uk/guidance/property-alert

Buy to let lenders subject to new regulation

Tuesday, November 22nd, 2016

Just when it looked as if things couldn’t get any worse for prospective buy-to-let investors – in particular the gradual withdrawal of higher rate tax relief for finance charges – the Bank of England’s Financial Policy Committee (FPC) will be granted new powers by the government to help it protect the financial system from future risks in the buy-to-let mortgage market.

The FPC is responsible for identifying, monitoring and taking action to remove or reduce systemic risks in the financial system. The new powers of direction will enhance the FPC’s existing macro-prudential toolkit – the tools it has at its disposal to head off potential threats to financial stability should they arise.

From early 2017, the FPC will be able to direct the Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) to require regulated lenders to place limits on buy-to-let mortgage lending in relation to:

  • loan-to-value (LTV) ratios
  • interest coverage ratios (ICRs)

It follows the FPC recommending that it be given additional powers of direction over both the residential mortgage lending market and the buy-to-let mortgage market in September 2014. The government granted the FPC powers over the residential mortgage lending market in April 2015. The government consulted on the FPC’s recommended powers relating to the buy-to-let market from 17 December 2015 to 11 March 2016.

The consultation noted the positive impact of buy-to-let landlords in the economy, and the role they play in widening and balancing the overall housing market. They provide good quality accommodation for those who cannot at this point afford to buy a home, or who do not wish to commit to home ownership for personal or employment reasons. At the same time, the consultation set out the financial stability risks that buy-to-let lending may pose and how the FPC’s recommended tools would address these risks and ensure long-term economic stability.

The Chancellor of the Exchequer, Philip Hammond, said:

It is crucial that Britain’s independent regulators have the tools they need to keep our financial system as safe as possible.

Expanding the number of tools at the Financial Policy Committee’s disposal will ensure that the buy-to-let sector can continue to make an important contribution to our economy, while allowing the regulator to address any potential risks to financial stability.

Are you paying rates on second homes or empty property

Thursday, October 6th, 2016

You may like to check out the following points. In many cases it would seem that local authorities have overall control over who can, or cannot, claim for reduced rates.

Second homes

You may pay less Council Tax for a property you own or rent that’s not your main home.

Councils can give furnished second homes or holiday homes a discount of up to 50%. Contact your council to find out if you can get a discount – it’s up to them how much you can get.

Empty properties

You’ll usually have to pay Council Tax on an empty home, but your council can decide to give you a discount – the amount is up to them. Contact your council to ask about a discount.

Your council can charge up to 50% extra Council Tax if your home has been empty for 2 years or more (unless it’s an annexe or you’re in the armed forces).

When you don’t pay Council Tax

If you’re selling an empty property on behalf of an owner who’s died, you only start paying Council Tax 6 months after you get probate.

Some homes don’t get a Council Tax bill for as long as they stay empty. They include homes:

  • of someone in prison (except for not paying a fine or Council Tax)
  • of someone who’s moved into a care home or hospital
  • that have been repossessed
  • that can’t be lived in by law, for example if they’re derelict
  • that are empty because they’ve been compulsory purchased and will be demolished

You may get a discount if your home is undergoing major repair work or structural changes, for example your walls are being rebuilt.

If your property’s been refurbished

Your council will tell you when you have to start paying Council Tax if you’ve been carrying out major home improvements on an empty property or building a new property.

You’ll get a ‘completion notice’ that tells you the date you must start paying Council Tax.

If your property’s derelict

Your property’s only considered derelict if it:

  • isn’t possible to live in it, for example because it’s been damaged by weather, rot or vandalism
  • would need major structural works to make it ‘wind and watertight’ again

You can apply to get a derelict property removed from the Council Tax valuation list. Follow the process for making a formal challenge to the VOA.

Tax and your home

Wednesday, October 5th, 2016

If you use your home for business purposes, rent out parts of your home whilst you are still in residence or if you rent out your home while you are resident elsewhere, you may need to consider the tax consequences. This article covers some of the tax issues that you may need to consider:

Use of home for business purposes

If the amount of space you use is limited to say one room, and if there is a duality of use (for example you may have a home office in the corner of a spare bedroom or your office may double as a hobbies room), then you should be able to charge your business a nominal amount to cover the “running costs” of the space occupied. Your claim will need to be restricted on a time basis to disallow the private use proportion.

Claims that fit into this category should cause you no personal tax issues as long as they are based on a realistic apportionment of actual costs and are discounted for private use.

It will also be unlikely that you will suffer any charge to Capital Gains Tax when you sell your home.

Renting a room

From 6 April 2016, you can let out a room or rooms in your house as furnished accommodation (not an office) and as long as the annual rents received do not exceed £7,500 per year (prior to 6 April 2016 the annual limit was £4,250) you will have no Income Tax to pay. If the rent is more than the limit, then only the excess is taxable. The “normal” basis (rents less allowable costs) can be claimed if this produces a better result.

If two persons are entitled to share the rental income, the above annual tax-free limits are halved.

Longer term lets when you are not in residence

If you let out your home, for example if you work abroad for a period of time, you will be subject to Income Tax on your rental profits.

When you subsequently sell your home there may also be Capital Gains Tax considerations. When you sell, a proportion of any gain that relates to the period (or periods) of letting may be taxable.

However, provided the property was your home at some time, you can claim reliefs, including principal private residence relief for the time it was your main residence, plus the last 18 months of ownership. Also, there may be some “lettings relief” relating to periods your home was let as above.

Homeowners’ private residence relief (for CGT purposes) is worth protecting. If you are considering any financial transaction concerning your home that you are concerned may have Income Tax of CGT implications, please call. It is better to sound out professional advice before the event…

Letting out part of your home

Friday, September 9th, 2016

There are a number of considerations that home owners will need to consider if they are letting out part of their home. The following points cover some of the more obscure situations that can arise:

I’m a tenant. Can I sublet part of the property or take in lodgers?

If you are a secure council tenant, you have the right to take in a lodger, but cannot sublet part without the council’s written permission, you cannot sublet the whole of a secure tenancy. If you are a private tenant, you should check the terms of your tenancy. If there has been nothing agreed to the contrary, the tenant would be free to sublet. However, in practice most private tenancies prohibit subletting: because there is something in the written tenancy agreement to this effect (either absolutely or without the owner’s permission) and/or because assured (including assured shorthold) periodic tenancies have this prohibition implied. But a tenant can of course ask his or her landlord for permission anyway. A tenant who has sublet in defiance of these prohibitions cannot use this as justification for denying his own tenant or licensee her rights, for example by evicting her illegally. Also, these restrictions only apply where the intended arrangement is for the tenant to “part with possession” of some of the property: if, for example, you were informally having a friend to stay, or taking in a lodger who you would be providing services to, you would probably not be giving exclusive use of any of the accommodation. Again, if any of these types of tenancies comes to an end, so generally will the sub-tenancy.

Will my home insurance cover be affected if I let part of my home?

It is very likely that insurance premiums will be increased by allowing someone to share the home, because of factors such as accidental damage. It is extremely advisable to check for both contents cover and building cover; and if existing arrangements will not provide cover if part of the property is let, to arrange to extend the cover.

Do I need planning permission or other consent from the local council?

You would not need planning permission simply for letting rooms, so long as the property remains primarily your home: but there could be a planning consideration if you were to use it mainly to earn money from letting accommodation.

What facilities should be provided?

You are free to decide most of these things with the person you let to, subject to the basic requirements of general housing law: you should provide access to kitchen, washing and toilet facilities (but these can be either the ones that you use or separate).

Does there have to be an agreement in writing?

Not unless the let is a tenancy for a fixed term of more than 3 years. But it is advisable to have one anyway, as this will make it easier to sort out any disagreements which may arise later. Even if there is nothing in writing, both parties must still do whatever they agreed to, except where this conflicts with their overriding legal rights and responsibilities.

Buy to let red tape

Tuesday, August 16th, 2016

Beset by a range of potentially, disastrous tax changes (primarily the withdrawal of finance charges as an allowable deduction – reduced instead to a basic rate tax credit), landlords of buy-to let residential accommodation also have to contend with a growing list of red-tape. We have listed below a number of compliance issues that are backed by legislation. Failure to comply with these can lead to penalties. Obligations include:

 

·         Building and landlord insurance

·         Gas Safety Certificates

·         Energy Performance Certificates

·         Electrical Installation Reports and Certificates

·         Smoke detectors on each floor

·         Carbon monoxide detectors if required

·         Copies of tenants references

·         Tenants agreement to receive communications by email

·         Proof that tenant has right to rent in the UK (copy passport for example)

·         Household inventory

·         Register your property business with HMRC

·         Tenants contact details

·         Protect deposit within 30 days of receipt

·         You are required to respond to written complaints within 14 days of receipt, in writing

·         Inform tenants prior to a property inspection

Provide tenant with:

·         How to Rent – the checklist for renting in England

·         Guarantors Agreement – if required

·         Assured Shorthold Tenancy Agreement

·         Information regarding Deposit Protection Scheme

·         Serve the correct form of notice to end tenancy

·         Tenant should sign a list of deductions made from rent deposits

·         Return whole or balance of deposit at end of tenancy

This list is by no means complete. Landlords that use the services of letting agents will no doubt have these points covered as part of their contract with the agent.

Do you have under-declared property income

Thursday, June 9th, 2016

HMRC have a long running campaign to encourage property owners who receive rental income from property, and who have not declared this income on their tax return, to get their tax affairs in order. The following example, reproduced from HMRC’s website, shows how this can occur.

Beena age 23

 

• Moved to Leeds to work in finance sector and purchased a 2 bedroomed flat to live in when she got there.

• She started a relationship and after 18 months moved in with her partner.

• Rather than sell her flat, which she saw as a good investment, she decided to rent it out. The rental income just covered the mortgage payments.

• She makes no SA returns and her only dealing with HMRC is through the payroll of the company that employs her.

• Beena’s total mortgage payments are circa £8000 per annum and the rent she receives is £8,400. She also has agent fees and maintenance costs to pay.

• Beena has not realised that only the interest payments on her mortgage are an allowable expense for tax purposes. The £3000 she paid last year to reduce the capital owed cannot be claimed. Therefore, she should have told HMRC about her rental income and paid tax on around £2,500 profit (allowing for other expenses related to maintenance, etc).

• If the profit was below £2,500 HMRC could collect the tax due on this through amending Beena’s PAYE code number without the need to complete a tax return.

 

If you own property that you let out and have not considered the tax consequences, please call to discuss your options. Making a voluntary disclosure to HMRC may save you money as HMRC will likely reduce any penalties payable.

Home owners may be caught by stamp duty increase

Friday, May 6th, 2016

From 1 April 2016, buyers of residential property that is not to be their main residence in England, Wales and Northern Ireland, will be liable for the higher rates of Stamp Duty Land Tax (SDLT). Basically any property subject to the higher rates, that costs more than £40,000, will be charged at the following rates:

 

Where applicable, the higher rates will be 3% above the standard rates of SDLT that apply to purchases of residential property. Each rate will apply to the portion of the consideration that falls within each rate band: Purchase price of property Rate paid on portion of price within each band
Up to £125,000 3%
Over £125,000 and up to £250,000 5%
Over £250,000 and up to £925,000 8%
Over £925,000 and up to £1,500,000 13%
Over £1,500,000 15%

These higher rates will be charged even if a home owner buys a replacement for their main residence before their present home is sold. This could create cash flow problems for the buyer.

For example, a residential property purchased as a main residence for £250,000 after 1 May 2016 would be liable for a SDLT charge of £2,500. If their present home is not sold before they purchase a replacement, then the purchase will be subject to the higher rates of SDLT that would amount to £10,000.

It will be possible to reclaim the £7,500 additional SDLT but only if a previous main residence is sold within 3 years of paying the higher rates on a new main residence. A refund can be claimed by making an amendment to the original SDLT return. Repayments need to be claimed within 3 months of the sale of the previous main residence, or within 1 year of the filing date of the return, whichever comes later.

For house purchases in Scotland a similar situation arises. The purchase of a replacement home before the existing main residence is sold would be subject to an additional charge to Land & Buildings Transaction Tax. In Scotland, the 3-year period is reduced to 18 months.

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