Association Of Residential Letting Agents

(ARLA) – Cornwall

Stephen Maggs & Alex Reed

Robinson Reed Layton

Property Tax Overview and

Update

Contents

• Income tax

• Capital gains tax

• Inheritance tax

• Structuring – corporate v personal

• Property dealing and development

• What’s new?

Alex Reed

Income tax – Overview

• Net rental profits subject to income tax

• Calculation = rental income less tax allowable expenditure

• Accruals basis – income is recorded when it is earned (not

received) and expenses recorded when they are incurred

(not when they are paid)

Income tax – Allowable expenditure

• ‘Wholly and exclusively’

• Examples – letting agent fees, accountancy fees, insurance costs, repairs

and maintenance costs, ground rent, service charges, utility costs,

advertising costs, loan interest etc.

• Specific tax deductions – 10% wear and tear allowance for ‘furnished lets’

(abolished from 6 April 2016 i.e. 2016/17 onwards), peculiar rules for

‘furnished holiday lets’.

• Non-deductible – private use elements, capital expenditure (improvements,

costs associated with buying and selling the property), loan repayments etc.

Income tax – Tax rates

• 2016/17 tax rates

– Personal allowance - £11,000

– Basic rate band - £11,001 to £43,000 (rental income taxed @ 20%).

– Higher rate band - £43,000 to £100,000 and £122,001 to £150,000 (rental income

taxed @ 40%).

– 60% band - £100,001 - £122,000 (rental income taxed @ 60%).

– Additional rate band - £150,001 + (rental income taxed @ 45%).

• Balancing payments (31 January following the tax year end) and payments

on account (31 January and 31 July).

Capital gains tax – Overview

• Tax on value uplift realised on disposals (sales and gifts).

• Capital gain/loss calculated

– Sale proceeds; less

– Acquisition cost;

– Associated costs of disposal (legal fees, estate agents fees etc);

– Associated costs of acquisition (legal fees, stamp duty etc); and

– Capital improvement expenditure.

• Gains above annual exemption taxable in year of disposal (exchange),

losses realised against gains realised in the year or carried forward to gains

realised in future tax years.

Capital gains tax – Tax rates

• Tax free – capital gains annual exemption - £11,100 in 2016/17

• 18% on gains within basic rate band

• 28% on gains within other tax bands

• Entrepreneurs’ Relief (10% on lifetime gains up to £10m)

– Unlikely to be available.

• Principal Private Residence (PPR) Relief

– Potentially available if you have used the property as a residence during the period of

ownership.

Steve Maggs

Inheritance tax – Overview

• Properties held at death valued at subject to 40% inheritance tax where

value of estate exceeds available nil-rate band (currently £325,000).

• Spousal exemption and transferrable nil-rate band.

• No beneficial reliefs available (unlike for property development

businesses).

• Lifetime gifts – but capital gains tax problem.

– Ways of gifting rental properties during lifetime and avoiding a capital gains tax

charge – involves using trusts.

• New ‘Main Residence’ Nil-Rate Band.

Structuring – Overview

• Company v personal

• Rental income realised in a company subject to corporation tax

– 20% small companies rate (reducing to 19% on 1 April 2017 and to 18% on 1 April

2020).

• Double tax charge on extracting net profits

– Options – salary, dividend income (subject to income tax) – note dividend tax changes.

• Unlikely to be beneficial for basic-rate tax payers

• Beneficial to higher-rate tax payers who don’t need to extract all of net

profits i.e. can roll-up income in the company.

• Likely Capital Gains Tax and Stamp Duty Land Tax implications on

transferring let properties into a company.

Property dealing & development

• Gains realised on property acquired with the intention of making a profit

are subject to income tax.

• Gains realised on property developed with the intention of making a profit

are subject to income tax.

• If deemed to be trading, the deemed income could also be subject to Class

4 National Insurance Contributions (and weekly Class 2 National Insurance

Contributions payable).

• Common misconception that such gains are subject to capital gains tax.

• Use of company may be way of mitigating such exposure.

What’s new?

• Stamp Duty Land Tax – 3% surcharge for ‘additional properties’ from 1

April 2016

• Restriction on income tax relief for finance costs for higher-rate income tax

payers

– Phased implementation over 4 years commencing on 6 April 2017

– 25% in 2017/18, 50% in 2018/19, 75% in 2019/20 and 100% in 2020/21 onwards

• Abolishment of ‘wear and tear allowance’ from 6 April 2016

• Increase in ‘rent-a-room’ exemption from £4,250 to £7,500 on 6 April

2016.

Contact details

Steve Maggs

Tax Director

Robinson Reed Layton

Peat House, Newham Road, TRURO,

Cornwall TR1 2DP

T: 01872 276116

stephen.maggs@rrlcornwall.co.uk