With numerous property tax changes already in place (and more due in 2020/21), there are a number of opportunities for adviser firms to help clients, says Zurich wealth specialist Andy Woollen.
Whenever I ask a roomful of advisers if any of their clients are landlords or own second properties – and I often do – most of the hands in the room shoot up.
Which tells me there is both a very real advice need for these clients, and work for me to do to help advisers navigate an evolving space.
The world of the landlord is changing. Research suggests that, over the next two years, 15% are considering either reducing their number of rental properties or getting out of the rental market altogether, largely due to legislative changes.
The same study found that 59% of landlords are aged 55 or over, and a third are retired.
With a number of tweaks to the tax system due to arrive in April next year, the considerations (and opportunities) that paraplanners should know about are numerous. As we shall see.
A variety of tax rules
For the Treasury, residential and commercial property make attractive tax targets. Unlike individuals and companies, bricks and mortar can’t cross borders in search of lower tax rates (as owners sometimes do).
For proof, consider the fact that business rates, council tax and property transaction taxes (stamp duty and the like) are projected to raise £80.2 billion in 2019/20, more than 10% of the total tax take. To that can be added tax on rental income and capital gains tax (CGT) on disposal profits.
Property investors face a variety of tax rules, many of which have been – and still are – in a state of flux.
The basic property regime
Property income is essentially taxed as a form of business income with a range of allowable expenses that can be offset against rental income.
These expenses have to be ‘wholly and exclusively’ incurred for the rental business (such as insurance, water rates, general maintenance/decoration and the costs associated with lettings).
Mortgage interest is an allowable cost, but whereas it can be fully set against rent for commercial property lettings (and any lettings made by a company), different – and changing – rules apply for individually owned buy-to-let (BTL) residential property.
Residential buy-to-let
This is an area which has undergone a series of reforms since April 2016, aimed at angling the playing field more towards the first time buyer than the BTL investor.
The first major change, from 2016/17, was the replacement of the wear and tear allowance (broadly speaking a 10% allowable deduction of the net rent from a furnished letting) with a more restrictive allowance based on actual – as opposed to hypothetical – expenditure on replacement furniture.
A year later, the first stage of a phased restructuring of mortgage interest relief took effect. This gradually replaces the ability to offset finance costs against rent with a tax deduction equal to 20% of the interest paid.
In 2019/20, the final year of the phasing process, only 25% of interest can be offset against rent, with the balance attracting the 20% tax deduction. From next tax year, only the 20% tax deduction will apply.
The move to the tax reduction approach means the amount of taxable rent increases, all other things being equal.
As a result, some BTL investors have suddenly found their total income triggering one or more of the various frozen thresholds littering the UK income tax system (£50,000 for the high income child benefit charge, £100,000 for personal allowance tapering or £110,000/£150,000 annual allowance taper limits).
One response to this additional income problem has been an increase in the use of companies to hold newly purchased BTL property with income drawn as required in the form of dividends.
However, with a dividend allowance of only £2,000 and the potential for both corporate and personal tax on gains, this strategy has its own drawbacks.
Another response has been to sell up, or at least consider the option of doing so. This may be one explanation for the recently reported 19% rise in CGT receipts between 2017/18 and 2018/19.
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