Archives

Tax Alert 30th April 2019 – should you invest in Furnished Holiday Letting?

Tax Alert 30th April 2019 – should you invest in Furnished Holiday Letting?

TAX ALERT

FURNISHED HOLIDAY LETTING – WHAT’s IT ALL ABOUT?

Residential landlords have certainly been taking a tax bashing over recent years.  Many landlords may now need to assess whether they can continue with so many tax charges now levied upon them.  It comes as no surprise that attention is focusing on different ways in which to invest in property.  One area that has been grabbing attention is Furnished Holiday Letting (FHL).

IS FHL THE ANSWER?

There is no question that if you have a property that can be let under the conditions to qualify for FHL, there are some attractive tax benefits.

Unfortunately, for many existing landlords FHL will not be a quick fix, as there are strict rules for meeting the FHL qualifying conditions.

The main clue lies with the description holiday letting, rather than having a few long-term tenants, the property must have multiple short lets.

NEW DIRECTION

Your existing property may not be suitable to qualifying for FHL but if you are a prospective investor or an existing investor looking to invest in a new property, FHL may be worth considering.  Perhaps you already own or have inherited a holiday property that you are not making full use of, with a bit of planning you may be able to turn it into a profitable business.

FURTHER INFORMATION

If you are looking for further information about FHL, Paul Southward has produced two guides to provide you with more information about FHL, the rules and the tax advantages.

The topic of FHL has recently become hot gossip at the moment but as is often the case they may not always be painting the full picture.

For a summary of the qualifying conditions for FHL, download Paul’s guide here:-

FHL – Qualifying Conditions

And for a summary of the main tax advantages see Paul’s guide here: –

FHL – Tax Benefits

For more information contact Paul Southward.

Paul Southward

Tax relief restriction – landlords finance expenses

Tax relief restriction – landlords finance expenses

The Summer of 2015 may now seem a long time ago but you may recall that in his Summer Budget that year the then Chancellor George Osborne announced the introduction of new rules for landlords of UK residential properties.

George announced that the relief for mortgage interest and other financial charges against UK rental income was going to be restricted to the basic rate of income tax.

Previously landlords were able to claim full tax relief at their highest marginal rate of tax against such expenses.

As was George’s way these changes were not to be introduced immediately, in fact not until a couple of years after his Budget announcement. To soften the blow the new rules were to introduced gradually over a four year period.

Unfortunately, George’s legacy is now with us and the first year of the restrictions commenced on 6th April 2017 and will gradually restrict the relief further until 2020/21 when the full restriction will be in place.

Those landlords that will be affected by the new rules will not fill the pinch until they come to pay their tax bills for the 2017/18 tax year which will not be due until 31st January 2019.

A summary of how the new rules are being introduced follows:-

  • In 2017/18, the deduction from property income will be restricted to 75% of the finance costs incurred, with the remaining 25% being available as a basic rate reduction.
  • In 2018/19, 50% of the finance costs will be given as deduction and the remaining 50% will be given as a basic rate reduction.
  • In 2019/20, 25% of the finance costs will be given as deduction and the remaining 75% will be given as a basic rate reduction.
  •  From 2020/21 all finance costs will be restricted to a basic rate reduction.

To further illustrate the impact of the new rules I have prepared an illustration showing the impact over the tax years 2017/18 through to 2020/21. You can access a copy of the Illustration here:-

Tax relief restriction

If you would like to discuss your property rental business and explore any potential tax saving opportunities, contact Paul Southward.

Paul Southward

Additional 3% SDLT charge

A reminder that the Additional 3% SDLT charge is now in place.

If you are planning the purchase of a UK residential property and you own another property at the time of the purchase, then you may need to consider whether or not you may be liable to the additional charge to Stamp Duty Land Tax (SDLT).

The additional 3% rate of SDLT for those purchasing ‘additional residential properties’ in England and Wales, such as second homes and buy-to-lets, is due to apply to completions from 1 April 2016, subject to some transitional relief (FB 2016 cl 117).

The increased SDLT rate will apply where, at the end of the day on which a property is acquired, the individual concerned owns two or more residential properties and is not replacing his or her main residence, which has been sold within the last 18 months.

Married couples and civil partners (unless they are separated in circumstances likely to be permanent) will be treated as a single unit for this purpose.

The 3% additional SDLT rate will also apply where an individual has sold their main residence and it takes them more than 36 months to complete the purchase of a new one, provided of course that the individual has more than one property at the end of the day the new property is acquired.

Where property is being purchased jointly, the additional 3% SDLT rate will apply to the entire value of the additional property if any of the joint owners already own a residential property.

In Scotland a supplementary transaction tax of 3% (now called the additional dwelling supplement (ADS)) will apply to second homes or buy-to-let properties.

The government have made a U-Turn with regard to the new tax being applied when a property is purchased with an annex, especially where the purchase is made to provide living accommodation for an elderly relative.  More details can be found here:

http://goo.gl/MFjhuP

Do contact us if you have any queries.

Stamp Duty Land Tax – 3% surcharge

After the announcement by George Osborne in last year’s Autumn Statement that he proposed to introduce a 3% Stamp Duty Land Tax charge on the purchase of ‘additional residential’ properties in the UK, the government have issued a consultation document that outlines how the proposals may work.

The main gist of the proposals are that, if at the time of purchasing a UK residential property you have more than one residential property (worldwide), and the property being purchased is not replacing your main residence which has been sold, then the 3% surcharge could apply.

The new proposals appear much more restrictive than originally envisaged and many potential loopholes have been covered:-

* Married couples and civil partners will generally be treated as a single unit when considering how many properties they own and which one is their main residence.   Somewhat, unfairly, unmarried couples can each own their own separate residential property and avoid the charge, even if they are cohabitating.  However, joint purchasers may be caught if one of them owns an additional property.

Other targeted loopholes that could be caught include:-

* A purchase through a company or partnership;

* A purchase for your child, where a parent is a joint owner of the child’s property;

* Ownership through certain types of trust, but not all types, so there could be some scope for planning here.

Where there is a delay in selling your previous private residence and the purchase of new residence so that two properties are still owned at the date of transaction, the additional charges will apply.  There is however, a mechanism for reclaiming the additional SDLT charged where the former residence is sold within eighteen months of the purchase of the new property.

Another trap is that if you own more than one property but sell your main residence and, say, live in rented accommodation, the additional charge could apply if you decide to purchase a new residence more than eighteen months after the disposal of your original residence.

The new charges are set to take affect from 1 April 2016, and the consultation closed on 1 February. Whilst the government have pledged that they will consider all responses, they expect to confirm the final policy by Budget day on 16 March 2016; which makes it unlikely that there will be any significant changes to the proposals.

Good news on the horizon for landlords

The taxman is becoming quite adept at sleight of hand tricks, whereby tax rules and reliefs are mysteriously changed or removed overnight.  On such relief was for landlords of unfurnished properties and the withdrawal of what was known as the ‘renewals’ relief.  Under this practice landlords could claim relief for the renewal of items in their rental properties such as; fridges, carpets, curtains, beds etc.  From 6 April 2013, the taxman made the renewals basis disappear, leaving landlords potentially out of pocket, when renewing items in their properties.

Landlords who let properties fully furnished were not able to claim the renewals relief but are entitled to an annual wear and tear (W&T) allowance based on 10% of the rental charges, and this was intended to cover the costs of renewals.  The W&T allowance is still available and this has led to a somewhat uneven pitch for landlords.

The good news is that the taxman is aiming to level the playing field for landlords.  HMRC have published a consultation document in which it discusses proposals to replace the W&T allowance with something that looks remarkably like renewals relief!

Under the proposals the initial cost of furnishings etc. will not be allowed as a deduction against rents (like it was under the renewals relief).  The cost of renewing items provided for the tenant’s use in a rented property will be allowable as a deduction (as was the case under renewals relief).

It should be noted that fixtures integral to the property such as baths, fitted kitchen units and boilers are not included.  However these costs would normally be allowable as a repair the property.

So as I see it, the result of the new proposals are to remove the W&T allowance for landlords of fully furnished properties and reinstate a sort of renewals relief for all landlords.

If the proposals go ahead the changes will come into effect from April 2016, so landlords may need to look closely at the timing of replacing items in their buy to let properties.

The consultation can be viewed on the GOV.UK website  at  https://goo.gl/eIz4De.

The consultation will be open until 9 October 2015 and any responses should be e-mailed to wearandtear.replacement@hmrc.gsi.gov.uk before that date.

We advise clients on all aspects of their rental income business, it makes sense to talk to us.