Buy to let property – Update Sean Egan CTA FCA Tax Partner No responsibility for any person acting or refraining from action as a result of this presentation can be accepted by the author/ Hale & Company LLP

Overview Recap What’s new? Income Tax Stamp Duty Land Tax Finance costs Wear & tear allowance Stamp Duty Land Tax 3% surcharge Capital Gains Tax 8% surcharge Calculating the tax credit for finance costs Interest relief on capital withdrawn from business Incorporation issues Hale & Company LLP

Restriction on Finance Costs Finance costs includes mortgage interest, incidental finance costs, commissions etc. Phased in from 2017/18 to 2020/21 Up to April 2017 Tax relief - up to 45% From April 2017 Tax relief reduces to 20% over 4 years Hale & Company LLP

Restriction on Finance Costs Full relief Basic rate relief 2016/17 100% n/a 2017/18 75% 25% 2018/19 50% 50% 2019/20 25% 75% 2020/21 Nil 100% Hale & Company LLP

Restriction on Finance Costs 2016/17 2020/21 Gross rents 7,200 7,200 Interest on mortgage -6,000 - Net rental profit 1,200 7,200 Tax @ 40% 480 2,880 Less: 20% interest relief - -1,200 Net tax liability 480 1,680 Profit/(loss) £720 (£480) Effective tax rate 40% 140%! Hale & Company LLP

It gets worse! Interest relief is the lower of 20% of: The disallowed finance costs The property profits Your ‘adjusted total income’ (does not include dividends) Can convert basic rate taxpayers into higher rate taxpayers Can impact on child benefit/ personal allowance/ pensions etc. Can affect the rate of Capital Gains Tax on capital gains Hale & Company LLP

Restriction on Finance Costs Residential property ownership only Not property dealing or developing Not Furnished Holiday Accommodation Does not affect company ownership of residential properties (but lots of other tax rules do!!) Hale & Company LLP

Restriction on Finance Costs – Our experiences Clients are starting to appreciate the impact Higher taxes Less surplus to reinvest Tax mitigation being considered Income splitting Incorporation Sale of properties Reducing gearing Tax schemes But…business as usual for serious BTL investors LLP

Recent developments Can I remortgage my BTL portfolio, use the proceeds for any purpose and get tax relief on the extra mortgage interest? YES Hale & Company LLP

Recent developments Interest Any purpose Up to market value of properties when first let Allowed to borrow to fund withdrawals of capital But not for overdrawn current accounts See HMRC guidance BIM45700 Hale & Company LLP

Recent developments £300,000 £100k £175k Hale & Company LLP

Recent developments HMRC have recently challenged this approach Interest on a remortgage loan on a buy to let property is a revenue expense “so long as the loan is wholly and exclusively for the purpose of the letting business” We await the outcome of the First Tier Tribunal!! Hale & Company LLP

Stamp Duty Land Tax 3% surcharge from April 2016 Residential property only Applies to individuals, companies & trusts One property for married couples/ civil partners Unless separated by Court Order or formal deed Replace home? – refund if sale within 36 months No relief for property development or trading Hale & Company LLP

Stamp Duty Land Tax 36 months Hale & Company LLP

SDLT rates - purchase price £400k Home Buy to let £125k x 0% = £0 £125-250k x 2% = £2,500 £250-400k x 5% = £7,500 Total = £10,000 £125k x 3% = £3,750 £125-250k x 5% = £6,250 £250-400k x 8% = £12,000 Total = £22,000 Increase is £12,000 £22,000 Hale & Company LLP

Capital gains tax (CGT) 2017/18 Annual CGT Exemption £11,300 CGT Rates on 2nd residential properties (Usual rates) Basic rate band up to £33,500 (18%) (10%) Higher/Additional rate bands > £33,500 (28%) (20%) That is, an 8% Surcharge! Hale & Company LLP

Residential property ownership - Personal Hale & Company LLP

Residential property ownership - Personal Acquisition Stamp Duty Land Tax Extra 3% Ongoing profits Income tax Finance costs restriction and higher income tax rates Disposal Capital gains tax Extra 8% Hale & Company LLP

Income tax on rental profits Income tax rates & thresholds BTL 2017/18 Basic rate band (20%) ? £11,500-£45,000 Higher rate band (40%) ? £45,001-£150,000 Additional rate band (45%) ? Over £150,000 Personal Allowance £11,500 (2017/18) Hale & Company LLP

Capital gains tax on sale Tax on gain on sale Capital gains tax Maximum effective tax rate 28% Hale & Company LLP

Residential property ownership - Company Hale & Company LLP

Residential property ownership -Company Acquisition Stamp Duty Land Tax Extra 3% Ongoing profits Corporation tax No finance cost restriction – up to 19% Disposal Tax on the gain No surcharge (unless ATED) up to 19% Hale & Company LLP

Corporation tax on rental profits Corporation tax rates 2017/18 2018/19 2019/20 Profits 19% 19% 17% Hale & Company LLP

Corporation tax on sale Tax on gain on sale Corporation tax 19% Indexation? Extraction Income tax 38.1%? Capital gains tax 20%? Effective Tax rate 35% plus Hale & Company LLP

Personal versus corporate ownership Company Income tax rates higher Less surplus available for reinvestment Finance costs restriction Overall taxes may be less on property sale Lower corporation tax rates (plus indexation) Full tax deduction for finance costs Larger surpluses for reinvestment Potentially higher taxes on property sale and profit extraction More Inheritance Tax planning possibilities Hale & Company LLP

Our experience thus far…. Hale & Company LLP

Couples planning Married couples or civil partners Default is taxed on equal shares Declaration of beneficial interest Joint tenancy or tenants in common? Declaration of trust Tax declaration Care where previous Own Main Residence occupation Unmarried couples etc. Actual profit share Hale & Company LLP

Transfer property into a company? The issues Transfer at Market Value so valuations needed SDLT on transfer values? Capital gains tax liabilities? Financing issues? Hale & Company LLP

Transfer property into a company? The issues Often not a proper business If there isn’t a business then; Capital gains tax - You pay it on any gains SDLT – You pay it on market value of the properties… …yet have no proceeds! Beware ‘schemes’ purporting to give tax advantages Hale & Company LLP

Conclusions - personal ownership Investors are not fully aware of the extra tax costs ‘Dinner party’ investors are more concerned! Some small scale investors are exiting the market, or de-gearing where it is possible But our advice for many is; Ignore incorporation…you won’t qualify Look after the basics Smaller portfolios suit personal ownership Hale & Company LLP

Conclusions – corporate ownership BTL investors with larger portfolios are seriously exploring the incorporation option Those running well established existing businesses at an advantage to incorporate For other businesses, a proper assessment is needed Hale & Company LLP

Our experience to date… BTL investors often not aware of the full impact of the tax changes For serious BTL investors…its business as usual BTL investors need ‘joined up’ advice – early in the process Beware aggressive tax planning No ‘one size fits all’…the devil is in the detail Hale & Company LLP

Belmont Place Belmont Road MAIDENHEAD SL6 6TB Telephone: 01628 626333 www.haleandco.co.uk Hale & Company LLP