• Contact Us

Recent Taxation Changes - How They Might Affect You

on Friday, 22 July 2016.

It's been a busy few years for tax professionals, in particular those who advise on property taxes.

There has been a raft of changes, driven primarily by a desire to reduce tax avoidance by non-resident and/or non-domiciled individuals, but also to discourage investing in residential property.

Income Tax

There are two recent changes to income tax rules which will adversely affect people who own rental properties.

From 2018 the ability of landlords to offset mortgage interest costs against rental income for tax purposes will be restricted. By 2021, the maximum relief will be 20% (equivalent to basic rate income tax - so landlords who currently pay tax at 40% or 45% will lose out).  It is possible that for landlords who have borrowed heavily, income tax will exceed the rental profits for the property.

Also, from April of this year, landlords are no longer be able to claim a 10% 'wear and tear' allowance against rental income when calculating income tax.

Stamp Duty Land Tax

Since1 April, any purchase of additional residential property attracts an additional 3% charge to Stamp Duty Land Tax. Additional means owning more than one property (whether solely, jointly, through some trust structures or through a company). This measure will affect buy-to-let investors, buyers of second homes, some married couples who each own a property and residential property developers.

Capital Gains Tax

Traditionally, non-residents have been exempt from capital gains tax on profits made on the sale of assets such as property and shares in the UK. From 6 April 2015 however, this exemption was removed in respect of residential property situated in the UK. Any gain in value of a residential property from that date will potentially be subject to CGT on a sale or disposal in exactly the same way as if the owner had been a UK resident.

A Non Resident Capital Gains Tax Return must be submitted to HMRC within 30 days of a disposal of a UK residential property by a non-resident, and any tax due must be paid at that point as well.

Finally, from 6 April there was a reduction in capital gains tax rates to 10% and 20% (depending on other taxable income for the year) for all assets except residential property; gains on a disposal of residential property will still be taxed at the old rates of 18% and 28%.

Inheritance Tax

Although UK property has always been subject to IHT, regardless of where the owner is resident or domiciled, it was always relatively simple to get around these rules by 'enveloping' the property in an overseas company, as shares in overseas companies are not subject to UK IHT if the owner of those shares is domiciled outside the UK.

So, from April 2017, any UK residential property owned by a non-resident company or trust will be subject to IHT when the owner dies, or where there is another trigger event for IHT, such as a 10 year anniversary of a trust.

Whilst the details of this new rule are yet to be finalised, there are obvious difficulties that will need to be addressed, such as:

  • how to ascertain the owners of foreign companies, or beneficiaries of foreign trusts
  • how to account for companies or trusts which own a mixture of assets
  • the high potential for tax evasion, given that HMRC will not normally be notified if a non-domiciled individual, who has no other assets in the UK, dies, and there is no other way to force disclosure
  • how the charge will be enforced against individuals or entities who are not resident in the UK

Annual Tax on Enveloped Dwellings

From 1 April 2013, any residential property which has been 'enveloped' (owned by a company instead of an individual) is subject to a new annual tax charge based on the value of the property.This tax was brought in primarily to combat tax avoidance by individuals who owned high-value UK property through company structures.

For properties owned by a company worth more than £500,000 used as a residential home, there is now an annual tax of:

Property value

Annual charge

More than £500,000 but not more than £1 million

£3,500

More than £1 million but not more than £2 million

£7,000

More than £2 million but not more than £5 million

£23,350

More than £5 million but not more than £10 million

£54,450

More than £10 million but not more than £20 million       

£109,050

More than £20 million

£218,200

There are exemptions to the tax, for example properties which are rented out on commercial terms.

Further detail is beyond the scope of this article; if you believe this tax applies to you then you must seek immediate advice, as the charge has been in existence for 3 years.

Summary

Overall, there is a trend towards higher taxation on second homes, whilst reducing taxation on the family home. There is also a trend towards aligning the tax treatment of UK residents and non-residents. It seems likely that this reflects wider unease both about high property prices and the impact on people wishing to get onto the property ladder. If you do own more than one property, it would be prudent to assess your portfolio now, to ensure you are not going to be adversely affected by these changes.


For more information, please contact Iain Aitken in our Commercial Property Law Team on 020 7665 0834.