The gradual, yet significant, changes to the taxation of UK residential property are varied, but on balance have been more favourable to businesses, in particular large businesses, over individuals. The prospects for buy-to-let investors in particular have been dampened. With further changes afoot to interest relief and inheritance tax, now is the time to consider options available for acquiring or restructuring UK residential property holdings.
Stamp duty land tax A stamp duty land tax (SDLT) surcharge of 3 per cent for additional properties was introduced in April. Additional properties include second homes, buy-to-let dwellings, or any property that does not constitute the owner’s main residence. For individuals with additional properties purchased for more than £40,000, each SDLT band will be 3 per cent higher. Notably, purchasers of six or more dwellings can choose whether to pay SDLT at the non-residential rates or, for any acquisition of multiple dwellings in a single transaction, claim multiple dwellings relief. If multiple dwellings relief is claimed, the higher rates will apply.
Tax relief from reduced interest Beginning in April 2017, investors and landlords paying higher or additional rate tax will start to see cuts to tax relief on interest payments, from 40 per cent or 45 per cent to a basic rate of 20 per cent eventually. Finance costs won’t be taken into account to work out taxable property profits. Instead, once income tax has been assessed, the income tax liability will be reduced by a basic rate tax deduction of the finance costs.
The change, which is being phased in over four years, will likely have more of an effect on those in higher tax brackets but, as usual, it depends – and investors should seek professional advice. Either way, companies are not bearing the brunt.
Relief from the 15 per cent flat rate of SDLT SDLT applies to both classes of investor. However, for individuals, the rate charged depends on the property price, with a maximum rate of 12 per cent for anything over £1.5 million (subject to the 3 per cent additional property surcharge). Companies that purchase a residential property worth more than £500,000 (this threshold was reduced from £2 million in March 2014) will pay a higher flat rate of 15 per cent. If the property is to be let out commercially, relief is available which will see companies pay the same lower sliding rates as individual investors. Similar reliefs are available from the annual tax on enveloped dwellings (ATED).
Other benefits for businesses Income from company-owned properties is taxed at the corporation tax rate of 20 per cent (falling to 19 per cent for the financial year commencing 1 April 2017 and to 17 per cent from 1 April 2020). Compare this to individuals whose rental profits are taxed at their personal tax rate, up to a maximum of 45 per cent. Their capital gains will again depend on taxable income, meaning a rate of either 18 per cent or 28 per cent (residential property is one of the few items not to benefit from the recent reduction in the top capital gains tax rate to 20 per cent). For businesses selling a property, capital gains will be charged at the corporation tax rate.
Conclusion The myriad of recent changes to the tax position of residential property holdings has led to a complex picture. With more changes to come, now is the time to review the position to see whether existing property holding structures are still tax efficient. While those who hold residential property for business exploitation have generally fared better than individuals holding residential property for personal use, in each case the best approach will depend on individual circumstances.
Client Alert 2016-202