Each property listed on Property Partner is held in it’s own tax-efficient special purpose vehicle (“SPV”). An SPV is a UK Limited Company, in which you can acquire a beneficial interest in shares.
This article has been written for Property Partner by Ben Handley, Tax Director in PwC’s London Private Business team, and describes the tax landscape in the UK residential property market, including the benefits of holding property in an SPV.
There have been a lot of changes in recent times to the taxation of UK residential property. Here we focus on the changes relevant to buy-to-let landlords which can impact significantly on the cost of purchase and throughout ownership.
With the new interest restriction rules having started to take effect from 6 April 2017, now is an appropriate time to recap on the changes and the impact they have.
Tax changes for landlords – a quick overview
Since 1 April 2016, an extra 3% stamp duty land tax (“SDLT”) has been applied to the purchase of additional residential properties. The extra rate applies if you already own residential property anywhere else in the world.
Those who wish to invest in residential property will have to factor this in as part of their cost. Those who are reluctant landlords, e.g. have let out their old home, relocated and now wish to buy a new permanent home, will perhaps feel harshly treated.
Up until 5 April 2017, a landlord could have obtained a full deduction for mortgage interest costs against rental profits. For example, if they earned £300 rent and paid £100 in interest, they would have had £200 profit subject to tax. From 6 April 2017, a restriction on the deduction for interest costs is being phased in over 4 years.
Taking the same example in April 2020 where the landlord earns £300 and pays £100 interest, the effective taxable profit is £250 for a 40% tax payer.
Wear and tear
Reform to wear and tear allowance is another recent change. Previously landlords could elect to take a straight 10% deduction of net profits to obtain relief for wear and tear to furnishings and fittings. Now, relief will only be available for costs incurred on like-for-like replacements to certain items.
The rate of Capital Gains Tax (“CGT”) on the sale of residential property is 28%, unless of course it qualifies for exemption as a main residence. Gains on most other classes of investments are subject to a maximum CGT rate of 20%.
So what are landlords doing?
In light of the above changes, larger scale residential property investors are perhaps looking at company ownership for their property portfolio.
With corporation tax rates set to reduce to 17% from 1 April 2020, which applies to profits and gains, and relief of full interest costs typically available, it can provide a more efficient structure for long term investments. Personal requirements for the withdrawal of profits and the associated tax costs will of course need to be considered.
Those who own properties personally and wish to transfer them to company ownership will need to consider CGT and SDLT, although reliefs are available in certain circumstances. Banking arrangements/refinancing costs and personal guarantees, for example, will also need to be considered.
The additional rate of SDLT on purchase and the restriction on interest costs being phased in from 6 April 2017 will hit some buy-to-landlords hard.
With lower rates of corporation tax and full relief for bank interest costs typically available, holding property through a company may be attractive for long term investment. The most suitable structure will however depend on a number of factors.
Last year, to help our clients understand these changes and many more, Dipan Shah, Malli Kini and I recorded a live webcast. We all work in PwC’s Private Business Private Client team and advise our clients on a broad range of property tax issues.
It was aimed at explaining the tax landscape to investors in UK residential property including buy-to-let landlords, non-UK resident and/or non-UK domiciliary investors. A recorded version on the webcast is still available to watch on-demand here or you can watch a short highlights video on YouTube.
Ben Handley is Tax Director in PwC’s London Private Business team.
Important Note: Property Partner does not provide investment or tax advice and any general information is provided to help you make your own informed decisions.