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Tag: Property

Property

  • FHLs – What Should You Do Before 6 April 2025

    These are the questions to ask yourself before going any further:

    • Is your FHL business profitable or loss-making?
    • Are you planning any significant refurbishments?
    • How much is your interest cost? 
    • Do you have other income from employment, self employment or a limited company?
    • Do you rent out other non-FHL rental properties?
    • Are you thinking of retiring or semi-retiring?
    • Do you make pension contributions based on FHL income?
    • Do you have family members already as part owners or potential part owners?
    • Did you start your FHL business recently or several years ago?
    • Has the property value increased since purchase?
    • Do you carry out a trade beyond simple property letting or might you want to start one?

    Your optimum tax efficient answer, will depend on your answers to these questions and probably a few more! Here are a few suggestions based on certain scenarios that we often see:

    1. Recent purchase of one FHL property

    We’ve seen an increase in FHL property purchases by employees and business owners since Covid, often funded by borrowings, which could have fed into the previous government’s reasoning to change these rules.

    Large amounts have often been spent making the property FHL-ready such as buying furniture, crockery, white goods and linen, decorating, safety improvements and adding cupboards. There are therefore carried forward tax losses.

    If you’ve not yet incurred these costs for your FHL, you may wish to do so to benefit from FHL rules which allow tax relief for more costs such as your initial purchases of furniture, crockery, white goods and linen.

    The property is expected to be profitable in the future after deducting buy-to-let interest. 

    Example ignoring brought forward losses:

    • Salary £40,000
    • Expected Rental Profit Before Interest £12,000 
    • Interest Paid £4,800
    • Currently, your income tax bill is: 20% of (£40,000 + £12,000 – £4,800) – £12,570 = £6,926
    • From 6 April 2025 your tax bill will become: 20%/40% of (£40,000 + £12,000) = £8,232 less 20% of £4,800 = £7,272
    • An increase of £346 every year without an increase in income.
    • Another impact from entering the higher rate band is halving your 0% tax band for interest income from £1,000 to £500, potentially adding a further £100 tax cost.
    • If your income is nearer to £60,000 before interest and you have children, your child benefit will start to be withdrawn. 
    • If your income is nearer to £100,000 before interest, you start to lose your tax free personal allowance!

    Your actions might be:

    1. Increase pension contributions against your salary to keep your income in the basic rate band, however, this clearly reduces your day-to-day cash to live on.
    2. If you’re an employee you can’t do too much about your salary unless you’re thinking of retiring or doing less work.
    3. If you’re a limited company owner, you may consider reducing the salary-dividends you take out of your company and if the £40,000 is mostly dividend income which won’t support personal pension contributions, you’d need to consider replacing some of this with company pension contributions.
    4. Increase the rent you charge to compensate for your increased tax cost. You’ll no longer be obliged to rent out the property for a certain number of days, so your model can become fewer renters at a higher rent.
    5. Shop around for a better buy-to-let mortgage to reduce your interest cost, although we often see this is pretty much under control.
    6. Transfer a proportion of your property to your spouse or adult children to spread your income across the family, however capital gains tax will be due on non-spouse transfers at 18%/24% unless you claim ‘holdover relief’ to delay the tax due until the recipient sells it.
    7. If you’ve owned the property for two years, sell your property before 6 April 2025 to benefit from 10% BADR (Business Asset Disposal Relief) assuming it’s not withdrawn on Budget Day.
    8. Sit it out, receive a reduced net of tax income and wait for future capital growth.
    9. Provide other services and argue that you’re carrying out a normal trade, similar to say a B&B or hotel.

    Losses – Your brought forward tax losses will be used up more quickly than before, being offset against £12,000 rather than £7,200 (£12,000 – £4,800), but may still offer some delay in the impact illustrated above.

    2. Professional landlord with a mix of FHLs and ASTs making an overall profit

    Landlords with several properties often without any other significant income may be known as professional landlords. Some properties may be funded by borrowings, and some are more profitable than others, with often a property needing a significant amount spent on it each year. Properties may be owned by both spouses, often also by adult children.

    Where a few FHLs are refurbished in the same year, this might cause an overall net FHL tax loss. Currently, losses from FHLs can only be offset against profits from FHLs, ditto ASTs. Moreover, the 

    Example after deducting any losses:

    • Expected FHL Rental Profit Before Interest £60,000 
    • Interest Paid on FHLs £10,000
    • Expected AST Rental Profit Before Interest £50,000
    • Interest Paid on ASTs £15,000
    • Currently, your income tax bill is: 20%/40% of (£60,000 – £10,000+£50,000) – £12,570 = £27,432 less 20% of £15,000 = £24,432
    • From 6 April 2025 your tax bill will become: 20%/40% of (£60,000 + £50,000) – £7,570 reduced personal allowance = £33,432 less 20% of £25,000 = £28,432
    • An increase of £4,000 every year without an increase in income.

    Your actions might be:

    1. Increase the rent you charge to compensate for your increased tax cost. You’ll no longer be obliged to rent out FHL properties for a certain number of days, so your model can become fewer renters at a higher rent or they might become AST renters.
    2. Shop around for a better buy-to-let mortgage to reduce your interest cost, although we often see this is pretty much under control.
    3. Transfer more of your properties to your spouse or adult children to spread your income further across the family, however capital gains tax will be due on non-spouse transfers, at 24%. 
    4. FHLs allow flexible allocation of profits and losses which will no longer be available. In particular HMRC regards joint spouse ownership to be a deemed 50% share unless they receive a declaration of trust and Form 17 in good time and which can’t be done retrospectively. It will be advisable to review this before 6 April 2025. 
    5. Transfer FHL properties to non-spouse family members, but claim ‘holdover relief’ to delay the gains for the recipients to pay 18%/24% on the entire gain when they sell them.
    6. Incorporate your property portfolio using capital gains tax incorporation relief to defer capital gains tax otherwise due. However Stamp Duty Land Tax will be a cost which might be a price worth paying for long run control over your income tax position and full tax relief for interest.
    7. Sell some FHL properties before 6 April 2025 to benefit from 10% BADR (Business Asset Disposal Relief) assuming it’s not withdrawn on Budget Day. You may choose the properties with the highest gain for the maximum benefit. Possibly reinvesting in new properties.
    8. If your FHL rents are currently chargeable to VAT, consider whether you may no longer need to be VAT registered.

    Losses – If you’re planning to refurbish a few FHLs, the new rules allow any FHL tax loss to be offset against both types of rents from 6 April 2025. As the FHL rules allow more costs to be tax deductible, you might bring forward some work to before 6 April 2025 using these rules while you can. You’ll still get tax relief either in 2024/25 if you still have enough FHL profits or in 2025/26 agaisnt all properties. Going forward, combining tax losses across FHLs and ASTs is likely to be helpful.

    3. Long term owner of a couple of FHL properties, nearing retirement age

    You have made fairly steady profits each year and seen a large increase in market value earmarked to enjoy in your retirement. 

    These tax changes will cost you 24% capital gains tax instead of 10% and even more income tax than illustrated above once your state pension starts to be paid. You may therefore decide to bring forward your plans. You may even decide to move into one of the properties.

    Example:

    • Market value £600,000
    • Original cost including stamp duty and solicitors £300,000 
    • Capital improvements not claimed for income tax £50,000
    • Selling costs £10,000
    • Tax free annual exemption £3,000
    • Capital gain £237,000
    • Capital gains tax of 10% is due on £237,000 = £23,700, assuming sufficient lifetime BADR of up to £1m remains available. 
    • From 6 April 2025, the capital gains tax due is 24% of £237,000 = £56,880, an increase of £33,180.

    Your actions might be:

    1. If affordable, maximise pension contributions during this tax year using your FHL rental profits as pensionable income while you can.
    2. Cease your FHL property business before 6 April 2025, locking in the favourable 10% BADR rate, ensuring you sell all properties within 3 years of cessation.

    Property tax is complicated. It’s therefore essential to obtain appropriate tax advice before taking any action suggested above, including Inheritance Tax implications. It’s likely some of the tax rates referred to above will increase in the Budget on 30th October, some of which may be immediately effective, so please check those changes at the time. 

  • Tax Checklist – Use It or Lose It – March 2016

    1. Pensions – up to £80k tax relief

    There is a one off opportunity to get tax relief for up to £80k pension contributions (usually £40k) for this tax year only. Check whether you might be eligible. 

    2. Pensions – earnings over £150k reduced tax relief

    A tapered annual allowance is being introduced so that tax relievable pension contributions will start to fall for people earning £150k from £40k to £10k when earnings are at £210k.

    3. Stamp Duty Land Tax – increases of 3% for second residential properties

    If you exchanged after 25 November 2015, remember to complete before 1 April 2016 to pay the current lower SDLT rates.

    4. Rented Furnished Property – wear and tear allowance abolished

    If you’re planning to replace furnishings, you can save tax by claiming the last wear and tear allowance in this tax year and claiming for actual spend in the next tax year after 6 April 2016.

    5. New Dividend Tax – owner managed companies increased income tax charge 

     You may find it makes sense to bring forward some dividends so they are paid by 5 April 2016 to save the higher 7.5% charges applying after that.

    Many people are affected by at least one of the above, so looking into the details before the end of the month will be time well spent.

     

     

     

     

     

  • 2015 Autumn Statement – Your First Christmas Present?

    Instead it feels as though there have been giveaways. Is this genuine?

    It looks as though some reforecasting from the Office Budget Responsibility, including higher tax receipts, allowed George Osborne some flexibility. 

    In that case:

    What presents do we want to return to the shop?

    1. Second homes and buy-to-let properties increased stamp duty from April 2016

    Although, according to the Chancellor We Are The Builders, the Chancellor added to the pain announced in the summer, making buy-to-let properties look less and less like viable investments for many people. If you’re happy with the interest tax relief restriction going forward, the obvious action is to complete your buy-to-let property purchase before April 2016 to keep your stamp duty bill down.

    2. Capital gains tax on residential properties due by up to 21 months earlier from April 2019

    When you sell a taxable residential property, such as a buy-to-let, you’ll be paying any tax due within 1 month of completion. In practice this will involve a lot of cooperation between accountants and solicitors. Presumably if you have a capital loss to use you can include that loss in your tax calculation to reduce your tax bill? Or will you have to fund a higher tax bill until you submit your year end tax return? Or perhaps it will simply be included in your quarterly digital account? 

    3. Quarterly reporting to HMRC if you’re in business, self employed or a landlord

    Modernisation of tax administration through the planned digital accounts will require you to give quarterly figures to HMRC. This could be seen as an extension of the quarterly VAT return system. Having said that, VAT annual accounting was introduced specifically to help small businesses with turnover under £1.35m to reduce their administration costs. This and the possible further intervention required by accountants during the tax year, isn’t consistent with the message that small business red tape needs reducing and they should have less need for accountants.

    As we know these gifts are wrapped up very well, but the reality is a new real time tax return system which will require some managing. 

  • The Good, The Bad & The Ugly – Autumn Statement 2014

    Public opinion has played a strong role in the Chancellor’s statement today and perhaps his announcements made at the Commons film set today can be summarised into the Good, the Bad and the Ugly.

    The Good – Property Owners, Savers

    At last the stamp duty system has been modernised, so it doesn’t distort the property market with a more logical % being charged in each band rather than on the whole property price.

    Savers can enjoy passing on their ISAs on death to their spouse who can continue to receive interest and dividends free of tax. With the higher cash threshold introduced recently, and previous years’ build up of balances, the tax potentially saved will be very welcome.

    Low and middle income earners enjoying a further £100 tax free personal allowance than previously announced or was that an excuse to repeat the Good news?

    The Bad – Non-Doms, Google/Amazon etc.

    These groups continue to be on the hit list. The charge a Non-Domiciled resident pays for the privilege of living here without paying tax on income kept abroad eg footballers will increase.

    If Google/Amazon etc are found to have moved profits abroad, tax at 25%, higher than the normal 20% charge, will apply. This doesn’t mean the UK will get 25% of what it thinks these profits are. It seems there’s a lot to discuss before that happens.

    The Ugly – Taking ‘Too Much’ Tax Relief

    This isn’t just about aggressive schemes, but now includes routine tax planning and use of reliefs when the government sees them becoming too successful or it’s a good soundbite in an election year.

    Sole traders when incorporating their business into a limited company have often enjoyed a good result all round from little capital gains tax on the sale to their company and the company getting tax relief on the amount paid to the owner. HMRC have presumably pointed out this is wrong and the Chancellor has agreed for all transactions effective from today.

    Banks can’t escape their past wrong doings and although restricting their losses to 50% when offsetting them against future profits sounds good now, I wonder what sort of precedent this sets for an arguably retrospective change because all companies have this expectation at the time they make the loss. Perhaps none of us, if the country’s finances don’t improve sufficiently, can rely on losses being offsettable in the future.

  • Autumn Statement – AKA The Pre-Budget Budget

    Today’s Autumn Statement was more of a mini Budget than usual. Presumably due to the recent pressure being applied by the opposition.

    The good news for businesses is that taking on an under 21 year old won’t cost you any national insurance, but only from April 2015. In the meantime, if you can’t wait, you can employ anyone on up about £22k (or more than one person on lower salaries) from April 2014, and, under a previously announced measure, this won’t cost you any national insurance either. Both rules will continue into April 2015, so you could arrange your workforce to cost you no national insurance at all.

    It has at last been recognised that small retailers need help in competing against the Internet. Potentially, the most valuable relief is a 50% reduction in rates when re-occupying an empty property. Being able to pay rates in monthly instalments may also be helpful for some.

    Despite the stated aim to simplify tax, we now have another class of national insurance: Class 3A. This is nothing to do with employment or business, but it’s worth knowing that there’s another route to topping up your additional state pension, if necessary.

    A surprise change to the capital gains rules on homes means that the 3 year rule helping to exempt many homes from some/all of its capital gains tax, is being reduced to 18 months. This means that if you no longer live in your residence and you let it out before selling it, you can only have the last 18 months of the letting period tax free, together with the actual period of your residence. This indicates a certain amount of impatience with second home owners and the reduced tax they pay.

    It’s also worth noting there are now plans to make inheritance tax returns online. This will save executors a lot of time and hopefully speed up the whole process with HMRC.

    HMRC might need this help too, seeing as they are under a lot of pressure to continually find more tax from new anti avoidance measures. Identifying, challenging, and retrieving this tax due isn’t easy, particularly within these time frames. Expect a more aggressive attitude in certain areas.

  • Why it might pay to furnish your buy-to-let property

    When you spend money on your buy-to-let property, you expect to get a tax deduction against the rents received to help keep your tax bill down.

    For those with children, this is even more important if your rented property might take you into the ‘no-go’ £50,000 – £60,000 income level where child benefit might be reduced or taken away completely.

    With residential properties, costs like agent’s fees and gas certificates are easily deductible. But what about the costs of white goods and furniture?

    The usual (now very valuable) capital allowances for trades, aren’t available for residential properties. Therefore, instead, before April 2013, there was a useful ‘non-statutory’ relief that allowed you to claim the cost of say replacing a cooker (the original cost can’t be claimed). This relief has now been taken away.

    What remains is, instead, claiming a 10% Wear & Tear allowance based on 10% of the rent due on your property. However, this only applies to furnished properties. Furnished means the sort of things you’d expect to see in a home such as a bed, sofa, dining table and chairs.

    With the availability of cheap furniture, you might find this is an investment worth making. You’d get tax relief for replacing white goods in the future. Of course, if the furniture itself gets damaged, you’d need to include its replacement cost within the 10% claim.

    As the Wear & Tear allowance is based on rent due, you can see that this is more of a possibility in higher rent areas.