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Tax relief changes for residential landlords: The ins and outs

As of next month (April), the Government’s widely-debated plans to limit residential landlords’ tax relief are set to come into force.

 But what will the changes involve? Will they impact all landlords? And what action, if any, should people be taking right now? David Gillies explores the ins and outs of the new tax changes, which have been the subject of much discussion and debate since they were first announced by the Government last year.

From April 6, 2017, tax relief on interest and finance costs for landlords with residential properties will start to be reduced to the basic rate of Income Tax.

Currently, landlords are entitled to claim the top rate tax relief of up to 45% on residential buy-to-let properties, but that’s all set to dramatically change once the new rules fully kick in, as this figure will be cut to 20%, the base rate of tax.

As a result of the changes, landlords will no longer be able to deduct mortgage interest payments or any other finance-related costs from their turnover before declaring their taxable income. According to the National Landlords’ Association, the plans will also mean a significant proportion of the 440,000 basic rate tax-paying landlords will find themselves winding up in the higher rate tax bracket.

But while April 6 2017 is when we’ll see the Government start to put the wheels in motion for its plans, the full effect of the changes actually won’t be felt right away. That’s because the reduction will be implemented using a phased approach over the next three years, which will see it fully in place from April 6, 2020.

Who will the changes apply to?

UK and non-UK landlords who let residential properties as an individual, or in a partnership or trust will all be impacted, as will trustees or beneficiaries of trusts who are liable for Income Tax on their property’s profits.

For resident companies, both UK and non-UK based, and landlords of furnished holiday lettings, it’ll be business as usual. They don’t fall within the jurisdiction of the new restriction and therefore will still be able to receive relief for interest and other finance costs as they’ve always done.

Which finance costs will be restricted?

 It’s anticipated the restriction will apply to interest on mortgages, loans (including loans to buy furnishings) and overdrafts. Other affected finance costs include:

  • Alternative finance returns
  • Fees and any other incidental costs for getting or repaying mortgages or loans
  • Discounts, premiums and disguised interest

Up until April 6, 2017:

Interest is classed as a deductible expense so, if a landlord’s total expenses exceed their rental income, it creates a loss that can be carried forward and used to reduce taxable rental profit (or increase a loss) later down the line.

From April 6, 2017:

A proportion of the interest (25% for 2017/18, 50% for 2018/19, 75% for 2019/20 and 100% for 2020/21) won’t count as an expense and therefore won’t be able to be taken into account when working out a loss. It can, however, be carried forward and used as credit in later years.

 What should residential landlords be doing now?

While these changes to tax relief for residential landlords may have been widely-talked about from the moment they were unveiled in the summer Budget 2015, there appears to be some uncertainty surrounding them, even now.

For those who haven’t already done so, now’s the time to focus on fully understanding the implications of what’s proposed, planning ahead and developing a clear strategy to address the widespread impact the changes will undoubtedly have once they’re in place. For instance, while residential landlords should already be in the habit of keeping a record of their losses carried forward for their tax returns, they’ll also need to report the amount of interest carried forward for 2017/18 and onwards, as part of the new rules.

The tax relief landscape for residential landlords is set to change beyond all recognition from April 6, but there’s no reason why it shouldn’t be anything but a seamless process for those who’ve done their research and got the right professional support and insight behind them.

Got any questions or want to find out more about how the tax relief changes for residential landlords will impact you? Or perhaps you’d like advice on how to ensure you’re complying with the new rules as they’re phased in? Call us on 01905 777600 or email us at mail@ormerodrutter.co.uk.


DSC4366About the Author

David Gillies specialises in private client tax, advising on personal tax with an emphasis on inheritance tax planning, trusts, tax efficient structuring for property portfolios and residence and domicile status. He has worked for “big 4” firms as well as smaller practices.

 


 

Inheritance tax planning for farmers and agricultural land

If structured correctly, farmland potentially benefits from generous reliefs from inheritance tax. This is a complex area and HMRC examines all claims very carefully. Anyone who owns farmland for any purpose, and even working farmers, should take advice about their inheritance tax position to ensure that their affairs are in order. Taking action now with effective inheritance tax planning could protect your land from an Inheritance Tax charge of 40%.

In certain cases, subject to strict conditions and a period of ownership test, agricultural property can qualify for up to 100% inheritance tax relief. However, this only applies to the pure agricultural value of the land concerned, so any possible hope value from the possible sale for development purposes can’t qualify.

Farmland often also qualifies for inheritance tax business property relief, which may cover any hope value from redevelopment, as this is not restricted purely to the agricultural value of the land. However, the land must be part of a business activity that will be continued by the owner and strict conditions also apply to this relief.

Farmers who diversify out of farming into other activities, such as fishing and fish farming, wind farms and let cottages can potentially continue to benefit from business property relief if they meet the necessary conditions, although agricultural property relief will cease to be available.

The farmhouse must also be taken into consideration. Usually the significant element of private use of the farmhouse means that it is not eligible for relief as a business property. However, there are some cases where the farmhouse qualifies for agricultural property relief. The size and character of the farmhouse is take into consideration and again strict conditions apply.

Inheritance tax relief for farmland, business and agricultural property is a highly complex area with many aspects to take into consideration. Many land owners will want to pass the farm down to their children as they reach retirement age, and at this stage it is vital that the correct structures are put in place in order not to lose the valuable reliefs available.

There are many different options available, such as bringing the children into a farming partnership which holds the farmhouse as an asset, or gifting the land to a family trust. Each situation is different and care should be taken when choosing an appropriate course of action to ensure that the various tax reliefs are utilised effectively.


 

This article is designed to highlight some of the issues surrounding business and agricultural inheritance tax relief, and we highly recommend that you seek professional advice when considering your own situation and planning for the future.

Ormerod Rutter are specialists in inheritance tax and estate planning, with a detailed understanding of how these reliefs work. If you would like to discuss this further, please don’t hesitate to contact us and speak to David Gillies.

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