Property Update | 2018/19

Property Update Winter 2018/19

In this Issue

Property Incorporation for Landlords A hostile tax environment has driven many landlords to register as a company.

Budget 2018 | Property Highlights

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Brexit’s Effect on the Property Market

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Landlords are increasingly choosing to invest in properties through companies rather than as individuals. Nearly half (44%) of buy-to-let mortgage transactions are now made by limited companies, according to data from Mortgages For Business. This is up from 42% in the second quarter of this year.

An explanation behind more landlords choosing to incorporate is that they want to pay less tax. Before 6 April 2017, landlords could deduct mortgage interest from rental income before paying income tax. But this tax relief is gradually being phased out, and from 2020 relief for financing costs will be restricted to the basic rate of income tax: 20%.

This will affect the profits of higher earners who previously qualified for relief at 40% or 45%. New affordability checks have also made it harder for landlords operating as individuals to borrow as much against a property as they could previously.

Landlords can avoid the increasingly punitive tax situation by setting themselves up as limited companies, as these benefit from favourable tax treatment of profits.

Landlords who pay higher or additional rate tax, and who have a mortgage, tend to benefit most from incorporating. If you hold a property in a company, profits are liable for corporation tax at 20% – this could potentially cut your tax bill in half.

Seven Taxes To Be Aware of When Purchasing a Property

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Incorporated landlords can also continue to deduct all their costs, including finance, from rental income for tax purposes. Setting up a limited company is mostly straightforward.

You’ll need to register at Companies House, which can be done online for £12. You’ll need a company name, an address, at least one director and details of any shareholders.

After you’ve established your business, you have three months to register the company for corporation tax.

Nearly half (44%) of buy-to-let mortgage transactions are now made by limited companies.

Running a limited company will involve a lot of paperwork. You will need to file company accounts and tax returns, as well as your own self-assessment tax return. If you hire staff, you’ll need to run a pay-as-you-earn salary scheme and workplace pension. You may need to pay an accountant, who can help you with things like drawing income from the company. Any salary drawn (above standard tax allowances) will be subject to income tax plus employee’s and employer’s National Insurance.

Most company directors take income as a combination of salary and dividends. In general, it’s a good idea to take both tax and mortgage advice before incorporating, to check it makes financial sense.

Incorporating your property portfolio can be very beneficial, but it is not without its cons.

For example, if you’re considering selling some of your properties in the future. In addition to paying corporation tax upon selling, the distribution of the post-tax retained profits in the company will then be subject to either income tax or capital gains tax, depending on how the funds are distributed, incurring an effective total rate of tax of between 42% and 44.7% for a high rate taxpayer. For an individual this will only be up to 28%.

By Andrew Coney Partner and Property Specialist 020 3146 1602 andrew.coney@raffiingers.co.uk

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Brexit’s Effect on the Property Market

Budget 2018 | Property Highlights

The property market in England and Wales seems to have taken a disappointing turn as Brexit uncertainty continues to have an impact. Sales are falling and prices are stagnating, according to a new analysis.

The last few years have been a time of great flux for taxation of the property sector.

And now that we have had time to digest the measures in the Budget fully, there are a number of measures that will once again impact the property sector. We have summarised these below.

They have been successful and have bcome popular as the technologies included within the scheme have been extended. Indeed the Budget continued that theme by, as expected, updating the list of qualifying technology once again.

Average prices in November 2018, excluding new build, reached £257,666, down 1% month-on-month and down 3.1% on a quarterly basis, while the annual growth of 2.4% is the lowest it has been since 2013.

Private Residence Relief from Capital Gains Tax (PRR)

Non-UK Resident Landlord Companies – Corporation Tax

The Chancellor announced that the automatically exempt final period of ownership for properties that have been at any time a qualifying private residence will be reduced to 9 months from April 2020. It is currently 18 months, which itself was the result of a reduction from 36 months in April 2014.

As previously announced, it was confirmed that non-UK resident companies with UK property income will from 6th April 2020 be chargeable to corporation tax rather than income tax. This is intended to level the playing field between onshore and offshore companies.

The details from LCP’s analysis also shows that sales have fallen year-on-year by 1% but the new build market is faring better, up 4.5% on an annual basis, although down by 2.5% quarter-on-quarter. New build prices at £297,986 represent a 15% premium over existing stock. The report also shows that in Greater London average prices reached £625,457 in November, up just 0.8% year-on-year and down 0.4% on a quarterly basis, the lowest growth since the Global Financial Crisis.

Annual sales are also falling, down 4.1%, while in the new build sector sales are down a more substantial 19.6% although new build prices at £734,701 have a 20.2% premium over existing stock.

‘Without a clearer picture of what to expect after 29 March 2019, it is unlikely that there will be any material change to the status quo’, Heaton, LCP Chief Executive Officer.

In the prime central London market prices and sales continue to fall. The average price in November was £1,859,365, down 2.7% month-on-month and down 5.9% quarter on quarter. Sales in this sector fell by 14.7% year on year and are now down over 45% since 2014.

‘The historically low levels of transactions are now not only having a tangible impact on estate agents, but also the Treasury.

The revenue from stamp duty for the first three quarters of 2018 is down by £685 million on 2017,’ Heaton commented.

She also commented that ‘more experienced investors are returning to the market to capitalise on extremely discounted prices and sterling depreciation’.

In addition, the availability of the lettings exemption that can provide up to an additional £40,000 of PRR per person will be restricted quite sharply. In future this will only apply to private residence disposals where the owner is in shared occupancy with a tenant. This is likely to block a claim for lettings exemption from all but a handful of disposals. Currently any disposal of a property qualifying for PRR where the property in question has also been let during its lifetime would qualify.

Structures and Buildings Allowance (SBA) The Chancellor has introduced a new allowance – the SBA. It feels very similar to the defunct Industrial Buildings Allowance that was phased out between 2008 and 2011.

The SBA will provide both corporation tax and income tax payers with an allowance of 2% per annum against the original construction expenditure incurred on buildings and structures provided that they are not used wholly or mainly as dwellings.

SBA is introduced with immediate effect for eligible expenditure incurred on new contracts after 29th October 2018 even though HMRC recognises that further consultation will be required in a number of important areas before the actual legislation can be introduced.

Capital Allowances – Special Rate Reduction The Chancellor announced that the special rate of capital allowances will reduce from 8% per annum to 6%. The special rate applies to a number of asset classes including “Integral Features” of qualifying buildings.

It is worth noting that the new SBA will offset this for people in the property sector and the Treasury’s impact assessment suggests there should be a net cost to the government (and thus a net gain to taxpayers).

Enhanced Capital Allowances (ECAs)

However, it was also announced that ECAs will be withdrawn entirely from April 2020.

Unfortunately, as enhanced capital allowances are being abolished on the same day as this is introduced, the previously unavailable tax credit associated with this incentive will remain out of reach.

SDLT – Improvements for Shared Ownership First-time buyers purchasing shared equity homes of up to £500,000 will be exempt from stamp duty effective from 29 October 2018. This measure is retrospective (up to 22 November 2017) and therefore any first-time buyers in this position will be able to claim a refund.

SDLT – Surcharge for Non-Residents The government is to consult on a surcharge of 1% for non-residents buying residential property in the UK. Business Rates For self-catering and holiday let accommodation, the government will be consulting on when these will become chargeable to business rates rather than council tax. The government has said that this is to ensure second properties are subject to the correct tax and are not falsely advertised as “available to let”.

Investment The Chancellor announced a £500million investment in the Housing Infrastructure Fund which it is hoped will result in 650,000 new homes and brings the total investment value to £5.5billion.

To help regenerate high streets, the Chancellor also announced a Future High Streets Fund of £675million. This will allow local areas to develop their high streets and make them fit for the future.

By Neill Staff Tax Partner 020 3146 1605 neill.staff@raffiingers.co.uk

ECAs were introduced almost 20 years ago to support investment in energy saving technology.

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Changes to Capital Gains Tax The property landscape in the UK brings some unwelcomed changes in the way that taxpayers will have to report and pay for Capital Gains Tax (CGT).

At present, a capital gain made by a UK resident individual is reported through the selfassessment tax return regime. This means that, if an individual disposes of a property anywhere, say, between April 6, 2018 and April 5, 2019 it will be notified on his or her 2018-19 tax return – which does not need submitting until January 31, 2020 (tax will be due on the same day). The current system means that it can be anywhere between 10 and almost 22 months before the CGT is returned and settled.

The government’s intention is that within 30 days of the residential property’s disposal, the beneficial owners (UK residents) must prepare a provisional CGT return and make a provisional payment on account of the CGT ultimately to be due.

This will be in addition to the existing CGT aspects of self-assessment. In other words, taxpayers will still have to fill in the CGT pages of their self-assessment tax returns and pay any outstanding CGT by January 31 after the tax year in question. The new regime will apply for disposals made on or after April 6, 2020.

It may appear that under this system, you have to report the same information twice.

The reason being is because every tax year is dealt with in isolation and it is only at the end of the year that you can truly aggregate all income, gains, losses, deductions and reliefs to formulate a properly reconciled and final tax position.

Having to report and make a provisional payment just 30 days after disposal seems far too short a reporting window for taxpayers and their advisers who have the unenviable job of putting together the provisional computations including details such as original cost,

incidental costs on acquisition, enhancements etc, which is difficult – especially if the property has been owned for many years. Exemptions to provisional reporting, however, do apply where there is no CGT to pay such as: 1 When there is a ‘no-gain/no-loss’ transaction.

2 Where the gain is covered by private residence relief.

3 Where any losses or annual exemption are sufficient to cover the gain.

Other imperfections are that there is no facility to reduce CGT payments on account (that is, get some of the provisional CGT back) if the taxpayer makes a capital loss later in the tax year.

Barry Soraff Partner 020 3146 1603 barry.soraff@raffiingers.co.uk

Seven Taxes To Be Aware of When Purchasing a Property The UK tax system can be complicated, and whilst some of us could benefit from simpler tax rules, it’s still important to be aware of the taxes that could affect us.

Here is a short summary of the seven taxes you could incur when getting involved in the property market.

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Stamp Duty (SDLT) or property transfer taxes. The rate changes depending on whether it is freehold or leasehold, whether it is commercial or residential and what country it is in. range from 2% to 15% and can include a surcharge for second homes – this is often cited as one of the reasons for the decline in buy to let properties.

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Inheritance Tax. The significant increase in property prices has brought many more owners into the inheritance tax net. When a property is passed down, most typically following a death, Inheritance Tax is incurred. This will usually be payable on the second death (as most estates are left to the surviving spouse).

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VAT. Although VAT is not generally payable on purchases of residential property, home improvements are subject to VAT. In the vast majority of cases.

Major improvements such as loft extensions or adding on rooms will incur a significant VAT charge as the builder will have to add on 20% to his costs.

Capital Gains Tax. Your main home is often exempt from capital gains tax, but second homes and holiday homes are not. For many years non-residents did not pay capital gains tax: this has changed and residential property gains are subject to this tax.

The Government has announced that it plans to increase this tax to all types of UK property from 2019.

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Annual Tax on Enveloped Dwellings.

Residential properties valued at more than £500,000 and which are not owned by individuals, for example properties owned by companies (either UK resident or non-UK resident), can be charged ATED.

Income Tax. If you are a non-UK resident, individual or company renting in the UK, you are subject to UK income tax on the profits of your trade/ property rental business. The new loan interest deduction rules could mean owners will pay tax on ‘income for tax purposes’ that is greater than their real income.

Council Tax/ Business Rates. This is charged on the value of property.

In the case of commercial property, this is implemented through a charge to business rates which is calculated by reference to the value of the property and a multiplier determined by the size of the business.

By Andrew Coney Partner and Property Specialist 020 3146 1602 andrew.coney@raffiingers.co.uk

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#TaxFromTheTrenches

“You get what you pay for...”

I had previously received an email, from a gentleman living in Australia (we’ll name him Dennis). He had received a letter from HMRC saying that they knew he had let his property out, and that he might like to consider making a disclosure under the HMRC Let Property Campaign.

Dennis explained that he’d rented out a property for a few years when he was in the UK. He had been in PAYE employment during this period and hadn’t realised that he needed to tell the tax office about his rental income. He then sold the house and emigrated to Australia a few years ago. He went on to ask me what was required in terms of getting straight with HMRC, whether I could help him, and what it would cost. I emailed him back with a detailed explanation of what needs to be done in terms of the campaign disclosure, rental accounts, establishing taxable income in the relevant years, together with a review of the possible capital gains position on the disposal of the property. I also quoted an all-inclusive fee for dealing with everything from start to finish.

The following day I received a reply from Dennis asking if I might be able to reduce my fee quote because another agent had been in touch quoting a fee that was substantially lower. Dennis made it perfectly clear that he would prefer to engage my firm to help because we had taken the time and effort to explain everything in detail, but the difference in fees was some £500.

People mainly go to accountants because they don’t fully understand about tax and want to pay a professional to take care of everything.

They are willing to pay a fee and just need the accountant to be honest in his level of

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understanding and service. Then of course there’s the whole issue of trying to save money, and let’s be honest, we all do this to some extent.

In this particular case, the other accountant had proposed a course of action that would have ended up with the client paying late filing and late payment penalties, which would not be payable using the disclosure facility. It is also likely that HMRC would launch an enquiry which needed to be avoided at all cost in case of penalties.

I sent an email to Dennis explaining that I couldn’t lower my fee quote, simply because I knew how much time it would take to deal with everything correctly. I also suggested that he check that the other agent had a decent grasp of the different areas of HMRC’s penalty regime and to see why he preferred not to use the disclosure facility. Dennis emailed me back within the hour to say that the agent had backtracked on almost everything he said and was now proposing an additional £300 on top of what he originally quoted. Dennis told me he no longer had faith in the other person (I refuse to call him an accountant any longer) and wanted to engage our firm instead.

I am glad Dennis changed his mind, not only because we will do a great job in getting him clear with HMRC, but I’m glad he didn’t go with the cheaper option and end up paying more tax and penalties than he would have saved in fees. Sometimes the saying is true that you get what you pay for...

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By Neill Staff Tax Partner 020 3146 1605 neill.staff@raffiingers.co.uk

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