Where a taxpayer is highly geared the tax
liability can be more than the net rental income after paying the interest
which could lead to financial difficulties for those individuals.
of the 10% wear and tear allowance for furnished lettings
6th April 2016 the 10% wear and tear allowance on fully furnished properties
will not be available. It is due to be replaced by a new Replacement
Furniture Relief. This means that expenditure on replacing items of furniture
and white goods will be allowed but if new items are added then they will not
be allowed on the initial purchase.
So what can landlords do?
effects of these changes can be mitigated in a number of ways which borrowers
may wish to consider:
the ownership of the property to a lower earning spouse.
is the simplest and easiest way to lower tax liability. But be careful. A
transfer between spouses is tax neutral but there may a stamp duty charge if
the amount of debt being transferred exceeds £40,000.
They also need to notify HMRC within 60 days if following the transfer the
property is held in any ratio other than 50 : 50. Otherwise HMRC will not recognise
the transfer until the notification is filed.
the rental property to a limited company or acquire new properties through a
higher rate taxpayers are now opting for this. Here's why :-
They get 100% tax relief on the mortgage interest.
Up to £5000 in profit can be taken as a dividend tax free. That could easily
be £10,000 if the company is set up with 2 shareholders i.e. husband and
Surplus profits can be used to pay off debt, acquire further properties or
fund a pension plan.
Transfer of the properties from individual ownership to a limited company can
be done without incurring capital gains tax using section 162 TCGA 1992
relief. There are a number of qualifying conditions but most professional
landlords can avoid huge amounts of capital gains tax subject to the
The drawbacks are :-
On the sale of a property the company pays corporation tax on any gain after
indexation relief. Withdrawing the sale proceeds could be problematic if all
the sale proceeds pushes the income into the higher rate band of 40%.
Currently the top rate of capital gains tax paid by an individual is 28%.
Transferring existing properties may give rise to a capital gains tax
liability as well as a stamp duty charge. Careful planning needs to be given
to establish the one off costs of transfer compared to the annual tax
A future budget may make changes that will counter any advantages.
changing the type of property let to either a commercial property let or a
furnished holiday letting.
changes do not apply to commercial property or furnished holiday lettings.
All the above options come with advantages and disadvantages as well as
pitfalls, so taking advice from a suitably qualified tax adviser as well as a
qualified mortgage adviser is imperative before borrowers take any action.