3. Property Tax planning
In the last 10 to 15 years there have been major changes to the tax rules of property letting.
A new tax compliance system and tax charge on company ownership of residential property, mortgage interest restrictions, stamp duty increases for owning a second property, increase of capital gains tax, a new way of reporting capital gains/losses or residential property and new rules for non-resident landlords are a few of those changes.
With all of these rule changes, it is understandable that property developers, buy-to-let owners or would-be buy-to-let owners are going to struggle to plan. It is clear that both UK and overseas residents face a minefield of taxes to worry about when looking to run a buy-to-let property or a portfolio of properties. Depending on how you wish to own the properties, taxes that could arise at any time are income tax, corporation tax, capital gains tax, SDLT or its equivalent in the devolved administrations, VAT, ATED or even inheritance tax.
At Telic we can assist you to negotiate the minefield of these taxes with our property tax planning service. With our extensive knowledge of property taxation, we can advise on matters such as opting to tax for VAT right through to helping you decide on whether incorporating your property portfolio is a good or bad idea.
For planning purposes, we can also advise on generous reliefs that are still in play such as those for furnished holiday lets (FHLs), capital allowances on a commercial property or even the rent-a-room relief, if you rent a room in the property you live in.
There are two possible bases of assessment that can be used to calculate UK property business profits and losses; the simplified cash basis, which is the default basis or the accruals basis.
In the cash basis income is taxed when received, whereas expenses are allowed when incurred.
In the accrual’s basis, income and expenses are recorded when a transaction occurs, rather than when payment is received or made.
As an unincorporated rental property business I am no longer able to claim relief on mortgage interest – is that correct?
If you were a landlord with a mortgage on your rental property before April 2017, any interest you paid towards your mortgage payments could be deducted from the income you made from your rental property, before you paid tax on it.
From April 2017 tax relief on mortgage interest began being phased out gradually and from April 2020, landlords are no longer able to deduct any of their mortgage expenses against their rental income.
You will however receive a tax credit based on 20% of the interest element of your mortgage payments.
The main benefit of opting to tax a commercial property is the ability to recover input VAT on associated costs. Businesses that are using the commercial property as their trading premises and are making taxable supplies in the course of their business, should be able to reclaim all input VAT in any case.
However, if this commercial property is rented out, output VAT would also need to be charged on the rent. Careful planning should be considered before electing to opt to tax as certain tenants (such as financial institutions provide VAT exempt services and cannot reclaim VAT).
If you have any questions or need further advice in this area, please get in touch and we will be happy to discuss further.