The last 24 months have seen so many changes across every aspect of our lives. This has been no different for property landlords. With an ever-changing landscape of legislation pre-pandemic, this area of the property sector has had a lot to consider and comply with, which has continued apace.
When looking at the key challenges facing property landlords, the things that spring to mind are the effects of Covid-19 on the property industry and the tax planning measures property landlords (based in the UK or overseas) can take to help now and in the future.
The top areas property landlords look for more information on include tax rules and advice, the impact of new rules and a reflection on the market. Some of the key points under each of these headings have been summarised below.
Capital Gains Tax – 60-day reporting period
When a UK residential property is disposed of, the disposal, plus any related Capital Gain Tax must be reported and paid to HMRC within 60 days. Despite this “new” rule being implemented from 6 April 2020, it is still widely ignored.
HMRC have easy access to full details of all UK property disposals and have been issuing large amounts of penalty notices where the 60-day reporting has not been made. There are penalties for late reporting, regardless of there being any gain or tax payable on the disposal. It is therefore an important area to be aware of and discuss with your advisor ahead of any transaction.
Full restriction to tax relief on finance costs/mortgage loan interest
Previously, full tax relief could be claimed on all mortgage loan interest paid by higher rate taxpayers on properties rented out. Over the past four years this percentage allowable for tax relief has reduced gradually each year.
However, this all changed on 6 April 2020. Now the full restriction to higher rate tax relief applies, leaving only a basic rate tax credit available to set against rental profits. In some cases this can mean that the personal taxes payable on rental income double.
A range of matters should be considered here in order to try to negate the potential large increase to rental profits and associated tax liabilities. Can the property ownership be shared to take advantage of lower tax band availability? Are all other allowable expenses being claimed in order to reduce rental profits? Are other income generating assets held in the most tax efficient manner? Finally, if little else can be done is the simple answer to consider a re-structure of any debts over your properties?
Incorporation of residential property portfolio business
Despite the rules mentioned above applying for higher rate taxpayers, companies can still claim full tax relief on finance costs/mortgage loan interest.
In view of full restriction of mortgage interest above, one of the most common questions is – “should I incorporate my property business” (i.e. move the properties into a company) and the answer is always “it depends!”
The reason for this is that we need to consider numerous areas, including:
- the short and long terms goals of property owners
- the potential tax transaction costs of moving the properties into a company
- the annual personal tax costs of removing the funds from a company
- any potential double tax cost of a future property sale in the company, with a withdrawal of the funds thereafter
There are too many variables to provide a ‘one size fits all’ approach to tax planning. That said, considering the impact of all of the areas is a good starting point to identify the best approach based on individual circumstances.
The market
Another frequently asked question is – “is now a good time to buy/invest?” Again, the answer is always “it depends!”
It depends on the type of property in question and goals for the purchase; is this a long-term investment or a quick turnaround? Understanding what you ultimately want to achieve will always help answer questions around timing, along with taking a holistic view of the market itself.
Typical trends seen over the last 12 months are centred around more space being desired, along with less time in city centre offices and a move for people migrating to more suburban, out of town living.
Now could be a good time to invest in property whilst lower values still exist in pockets of Scotland, but it really does depend on your long-term goals and individual circumstances.
Looking ahead, we would hope to see a period of relative stability across the property market, but as these past 24 months have shown, anything is possible!
