Rachel Pearce, a Tax Director at MHA Carpenter Box, looks at some important tax considerations for property investment businesses
Tax relief for mortgage/loan interest for residential Buy-to-Let investors
Many landlords have already started to feel the pinch following the restriction on mortgage interest deductions on rental income. The amount of interest eligible for tax relief at the higher and additional rates (40% and 45%) is restricted as follows:
• 50% of the interest paid in 2018/19
• 25% of the interest paid in 2019/20
The remaining interest will be eligible only for income tax relief at the basic rate (20%). From April 6th 2020, higher or additional rate taxpayers will only be able to claim relief on any Residential Buy-to-Let (RBTL) interest at the basic rate.
Unfortunately, the way this restriction operates means that a taxpayer’s total income will no longer include a deduction for the restricted interest. This might further affect a taxpayer’s position if this increase means the taxable income consequently exceeds certain other thresholds – for instance, it could reduce the availability of Child Benefit, the personal allowance or the pension savings annual allowance. Our advice is to look at the whole picture to make sure you’re aware of all the knock-on effects that might happen as this mortgage interest/loan tax relief reduces.
Annual Tax on Enveloped Dwellings
Annual Tax on Enveloped Dwellings (ATED) can apply when a residential property with a value of at least £500,000 is held in an ‘envelope’. Broadly, an envelope includes a limited company, an LLP with a corporate partner or a collective investment scheme.
For any properties owned at April 6th 2019, unless the ‘envelope’ is a charity, a return will need to be filed by April 30th 2019 and any tax paid and/or reliefs claimed. In the case of a mid-year acquisition, a separate return must be filed within 30 days of purchase. These deadlines are easy to miss so make sure they are diarised if they apply. Penalties will be charged if the deadline is missed.
Structure and Buildings Allowances
It was announced in the 2018 Budget that a new tax relief will be available for businesses (including property rental businesses) that incur capital expenditure on the construction or improvement of non-residential buildings and structures. The relief known as Structure and Buildings Allowances (SBA) will apply at an annual rate of 2% on a straight-line basis once the property has been brought into use.
The guidance issued in the 2018 Budget states that the relief will generally not be given for construction projects which began before October 29th 2018. In contrast to the tax relief which applies for fixtures in buildings (which will continue unchanged), there will be no balancing allowance or charge when the property is transferred (the new owner will claim the remaining relief) and the relief will reduce the base cost of the property for capital gains purposes.
How we can help
As you may realise Property Tax can be complex. At MHA Carpenter Box, our specialist tax advisers can guide you through the world of property investment (we even advise law firms on certain aspects such as Stamp Duty Land Tax). We provide all the support you need to get the certainty you require on all property related matters.