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Buy-to-Let Property and the Taxman

Written by Jon Cooper

The Summer Budget included a significant change that will impact the Buy-to-Let property market.

As it stands, individual landlords receive tax relief on their mortgage interest payments at their marginal tax rate. For wealthier landlords, this means a tax relief of 40% or 45%.

The government has deemed this to be an unfair advantage over the ordinary homeowner. As a result, from April 2017 a four year programme will reduce this tax relief until it is ultimately fixed at the basic rate of tax.

In essence, once this change is fully implemented, the amount of mortgage interest tax relief available to a landlord in the Higher Income tax band will be halved.

At the same time, the rate of Corporation Tax is set to fall to 19% in 2017, and then to 18% in 2020.

The impact of these changes appear to make it much more attractive to purchase a property portfolio, even of one property, through a corporate structure.

Not only will the level of tax be less than that owning a Buy-to-Let property personally, but also there is a far wider pool of allowable business expenses that reduces the amount that is subject to tax.

However, landlords, especially in London and the South East of England, need to be aware of the Annual Tax on Enveloped Dwellings (ATED). Enveloped in this context means owned by a company, a partnership with a corporate member or another collective investment vehicle.

The tax came into force in 2012 and was originally aimed at companies that owned a high-end UK residential property or properties valued at over £2m.

However, from 1st April 2015 this property value threshold reduced to £1m and from 1st April 2016 a further band will come into effect for properties valued between £500,000 and £1 million. These properties will be subject to an initial Annual Charge of £3,500 that set to rise by the rate of inflation.

Moreover, there is no guarantee that ATED will not be extended to lower value property in the future.

Whilst there are reliefs available that could reduce or eliminate the ATED completely, these can only be claimed as part of the submission of an ATED return. This is both compulsory and separate from all the other HMRC filings. You would even need to submit a different authority form to appoint a tax advisor or accountant as Agent from the 64-8 used for PAYE, VAT and Corporation Tax.

Another important consideration is that if the property within ATED it is likely that the profit on disposal will be subject to Capital Gains Tax rather than Corporation Tax.

If a property consists of a number of self-contained flats each flat will usually be valued as separate dwellings. On the other hand, if there is internal access between the two or more flats either within the same building or in adjoining buildings these would be treated as one dwelling for ATED purposes.

All properties within ATED must be revalued on 1st April 2017 to set the value to cover the five years of ATED returns starting on 1st April 2018. This valuation is a self-assessment by the company on an open-market, voluntary sale basis and is reported on the return.

Needless to say, if HMRC challenges a valuation and it is found to be incorrect, there are severe penalties.

At CooperFaure, we are currently working with a number of clients with both individual and corporate property portfolios and would be pleased to review your circumstances. Please email us at welcome@cooperfaure.co.uk for an initial, free consultation.

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