Wear and tear allowance
Abolished in April 2016, this relief provided around a 10% tax deduction of rents received to reflect the average cost of continually furnishing a property. In its place, individuals can claim tax relief on the actual cost of replacing furniture, but this is likely to be less generous.
Introduction of a 3% surcharge on Stamp Duty Land Tax
From April 2016, a 3% surcharge on the Stamp Duty Land Tax rate is applied when acquiring a new rental property or second home. Relief is limited and there are a host of pitfalls. For example, if you buy a new home in the UK before selling your original home in Hong Kong you will be liable for the surcharge. You can claim this back if you sell the original home within 36 months – but this is a cash flow pinch at a time when you may be able to least afford it.
Capital Gains Tax reductions not applicable to UK property
Capital Gains Tax rate reductions introduced by the 2016 UK Budget do not apply to UK residential property. Gains realised on properties not covered by Principal Private Residence relief or lettings relief will be subject to the higher rates of 18%/28%, compared to the reduced rate of 10%/20%.
Tighter restrictions on offsetting mortgage interest
From April 2017, tighter restrictions on offsetting mortgage interest are being phased in. In 2017/18 only 75% of mortgage interest costs will be permitted as a deduction against the rents received. This will be reduced by 25% each subsequent year. The remaining costs will be given limited relief through a credit against your tax liability at 20% of the costs. By 2020/21 relief will only be given by a “tax reducer” credit. For higher rate UK taxpayers this could mean increased taxes or even negative profits. At present, companies that let property can continue to offset finance costs in full.
Inheritance Tax changes
Residential property moved into UK inheritance net, even if held by a non-UK company. If you've been using a non-UK company to hold UK residential property to protect yourself from UK inheritance tax, it might be time to think again. From April all UK residential property will move into the inheritance tax net, even if it's held by an offshore company.
Company shares will no longer be ignored for Inheritance tax purposes, resulting in a 40% inheritance charge on death. Restructuring will be judged on the potential Stamp Duty Land Tax and Annual Tax on Enveloped Dwellings related Capital Gains Tax charge that could arise. For an overview of these taxes, please download our UK Residential Property Tax Update.
It may be beneficial to unwind the company to remove the annual liability but in some instances, the structure may continue to be the most appropriate vehicle or, perhaps, the best of a set of bad options.
Get help with UK property tax rules changes
For further guidance and advice around UK property tax rule changes, which is tailored to your personal situation, please reach out to your usual Buzzacott contact or get in touch with us here.