property tax overview and update€¦ · • stamp duty land tax –3% surcharge for ‘additional...
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Association Of Residential Letting Agents
(ARLA) – Cornwall
Stephen Maggs & Alex Reed
Robinson Reed Layton
Property Tax Overview and
Update
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Contents
• Income tax
• Capital gains tax
• Inheritance tax
• Structuring – corporate v personal
• Property dealing and development
• What’s new?
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Alex Reed
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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)
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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.
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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).
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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.
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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.
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Steve Maggs
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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.
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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.
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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.
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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.
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Contact details
Steve Maggs
Tax Director
Robinson Reed Layton
Peat House, Newham Road, TRURO,
Cornwall TR1 2DP
T: 01872 276116