The Chancellor’s recent announcement last December regarding a rise in the amount of SDLT payable by landlords and second home owners has received much attention in the media. However, last summer’s Budget contained another key announcement that landlords need to be aware of.
Currently, buy-to-let landlords can deduct their costs (including mortgage interest) from their profits before they pay income tax. Landlords paying income tax at the higher or additional rate receive tax relief at 40% or 45%.
However, in the Budget on 8 July 2015, the government announced that it would restrict the relief on finance costs that individual landlords of residential property are entitled to, to the basic rate of income tax (20%). Accordingly, individual landlords will not be treated differently based on their status as tax payers and the rate of income tax that they pay. The new restriction was passed as part of Finance (No. 2) Act 2015 and will be phased in over four years, starting from 6 April 2017, with the permitted deduction from profits being 75% of the interest charge for 2017-18, 50% for 2018-19, 25% for 2019-20 and 0% thereafter. In each of those years, the percentage of the interest not deducted will be given as a basic rate tax deduction. The restriction will not apply to the interest relating to properties that qualify as furnished holiday lettings.
Mortgage Interest Relief was withdrawn from homeowners 15 years ago. However, landlords still receive the relief. The government’s concern was that the current tax system supports landlords over and above ordinary homeowners and puts buy to let investors at an advantage.
The move came as the Bank of England expressed concern that the rapid growth of buy-to-let mortgages could pose a risk to the UK’s financial stability. In its Financial Stability Report published earlier this month, the Bank stated that it would closely monitor the sector’s activity following the cut to tax relief announced by the Chancellor.
The government will also reform how landlords of residential property can account for the costs they incur in improving and maintaining rental property. As things presently stand, landlords can deduct 10% of their rent from their profit to account for wear and tear, irrespective of whether or not any maintenance or improvements have actually been carried out. This means that landlords can automatically reduce their tax liability even when they have not incurred any costs maintaining or improving the property. From April 2016, however, the government will replace this allowance with a new system that enables all landlords of residential property to only deduct costs they actually incur.
Landlords concerned about this change will need to review their investment strategies to ascertain how it will impact on them from a tax and profit perspective.
For further information on the new rules, please contact Jonathan Achampong, senior associate in the Residential Property Team, or Oliver Embley, associate in the Private Client team, or your usual Wedlake Bell adviser.
As property prices continue to rise in the UK it has become increasingly common for parents to assist their adult children with buying a first property. However, buying a property can be a highly emotive experience and there is often some uncertainty among parents about how best to structure the gift/purchase so as to both assist their child and protect their child’s best interests.
As a parent, broadly speaking, your options are as follows:
Gift the property to your child outright. This is a simple way of helping your child and an effective form of inheritance tax planning for your estate. However, it leaves your investment vulnerable to risks in the event of your child’s divorce, bankruptcy or death. It also leaves you with no control, should your child wish to sell the property and spend the sale proceeds.
Co-ownership with your child. Again, this would present an inheritance tax planning opportunity for you. It would also give you some control over the investment and offer some protection against the risk of an unfortunate change in your child’s financial and/or personal circumstances. Care would need to be taken to ensure that any co-ownership documents are drafted to reflect what you and your child wish to achieve.
Creation of a trust to own the property. You could transfer funds into a trust and the trust could purchase the property. This option provides you with the possibility of having maximum control whilst also offering inheritance tax planning opportunities for both you and, over the long term, potentially your child. Trusts also offer protection against the risks outlined above. As trusts do have their own legal identity you would need legal advice on the right trust for you, any setup and ongoing tax, and administration charges.
Loan to your child. You could loan your child the funds to buy a property and then take a charge over the property. This would be the solution if your main priority is to reduce the risk of losing the funds that you have invested rather than seeing the investment as part of your inheritance tax planning.
Most people are aware of the two forms of property ownership in England and Wales (freehold and leasehold proprietorship) and flats being sold with a ‘share of freehold’ are often seen as more attractive to prospective buyers.
However, the phrase ‘share of freehold’ can sometimes lead to confusion among prospective purchasers and flat-owners alike. Some of the most common misconceptions are revealed in comments such as ‘but I’m getting a share of freehold’ and ‘why do I need consent when I own a share of freehold?’
Here’s a list of 5 things prospective buyers should keep in mind about flats that come with a ‘share of freehold’:
This article was first published in The Resident Magazine.
A lease is a contractual arrangement between an owner of land (e.g. the freeholder) and tenant (i.e. the leaseholder/lessee), giving the tenant the exclusive use and enjoyment of property for a fixed period of time in exchange for a lump sum and/or intermediate payments.
Under the terms of a lease, both the landlord and the tenant will have different responsibilities. Every lease is different, so it is important to check what the lease actually says.
Typically, a lease might impose the following obligations on a tenant:
A landlord will be under a duty to allow the tenant to quietly enjoy to the premises. A landlord may also be responsible for insuring the building and maintaining the common parts.
Ground rent is a regular (e.g. quarterly, half yearly or annual) payment made by the owner of a leasehold property (i.e. the tenant or lessee) to the landlord. A ground rent is normally created when a landlord sells off a building or a flat within a building to a tenant on a long lease. The creation of a ground rent on land provides an income to the landlord.
A landlord cannot unilaterally increase the ground rent if this is not provided for in the lease. However, many leases will include a formula by which increases in ground are to be calculated. This can range from stepped increases in the ground rent every 25 years to increases in rent linked to the Retail Price Index.
An underlease is a lease which has been granted by one who himself is a leaseholder. A key characteristic of an underlease is that it must be for a period of at least one day shorter than the lease out of which it has been granted.
The Leasehold Advisory Service is a non-departmental public body funded by Government to provide free advice on the law affecting residential leasehold property in England and Wales.
A sublease is a lease which has been granted by one who himself is a leaseholder. A key characteristic of a sublease is that it must be for a period of at least one day shorter than the lease out of which it has been granted.
The phrase ‘Section 42 Notice’ refers to the statutory notice which initiates a tenant’s claim for a lease extension.