Tax rules come hometoroost

UK RESIDENTIAL property continues to be the target for the taxman. Over the past few years, the Chancellor has consistently focused on three key tax areas, considered below. STAMP DUTY LAND TAX (SDLT) Since April this year, SDLT has increased to a top rate of 15 per cent. Although the extra three per cent does not apply for the first property acquired by an individual or the replacement of their home, it catches most joint-ownership structures, buy-to-let businesses and all companies.

Where a business or company acquires six or more residential properties in a single transaction or a residential property with commercial property, it may be possible to benefit from lower SDLT rates of up to five per cent.

This will depend on the specific facts of the transaction. CAPITAL GAINS TAX (CGT) ON DISPOSAL BY INDIVIDUALS Capital gains tax for individuals has been reduced to 10 per cent or 20 per cent, dependant on total taxable income and gains. However, the reduction was not passed on to residential property investors where the existing rates of 18 per cent or 28 per cent continue to apply.

The Government is also in the process of amending anti-avoidance legislation which re-categorises capital gains realised on UK property as income. Rather than being subject to a tax rate of 28 per cent, the higher rate of 45 per cent may apply.

The change could now tax situations where a property is acquired for income over a period as well as realising a gain on future disposal. Private Principal Residence relief could also be denied where the legislation is applied. HMRC has issued guidance that “the legislation should always be understood in the context that it is taxing only what are in substance trading profits”. However, given the wording of the Finance Bill, there is a risk that a future gain could be taxed as income despite current guidance. RESTRICTING TAX RELIEF FOR INTEREST Individuals’ tax relief for mortgage interest on a buy-to-let residential property is to be restricted to the basic rate of 20 per cent. This measure will be phased in over four years from April 2017 and will affect individuals who pay tax above the basic rate.

For example, Mr C (a 45 per cent taxpayer) has a house with net rental income of £100,000 and mortgage interest of £90,000.

Currently he would pay £4,500 income tax on profits of £10,000. From April 2020, he will pay £27,000 income tax (based on current rates) and the end result would be an overall annual loss after tax of £17,000, with insufficient cash flow to make repayments on his loan.

A company is not affected by these measures and therefore would receive full mortgage interest relief, with corporation tax charged at 20 per cent and due to fall to 17 per cent in 2020.

Using the above example, a company would pay £2,000 currently and £1,700 from 2020; leaving sufficient funds to make repayments.

This has led investors to consider whether they can incorporate existing structures.

In this context the impact of CGT, SDLT and annual tax on enveloped dwellings would need to be considered.

There is no one route fits all and buyto-let investors need to take advice as to which structure would be more appropriate for them. Adrian Benosiglio is real estate tax partner at RSM, 020 3201 8694, adrian.benosiglio@rsmuk.com