Tax planning for property investment businesses
Tax relief for mortgage/loan interest for residential Buy-to-Let investors
The amount of interest eligible for tax relief at the higher and additional rates (40% and 45%) is restricted as follows:
- 50% of the interest paid in 2018/19
- 25% of the interest paid in 2019/20
The remaining interest will be eligible only for income tax relief at the basic rate (20%). From 6 April 2020, a higher or additional rate taxpayer will only be able to claim relief for any Residential Buy-to-Let (RBTL) interest at the basic rate.
The way that this restriction operates means that a taxpayer’s total income will no longer include a deduction for the restricted interest. This can further affect a taxpayer’s position if this increase means the taxable income then exceeds certain thresholds which reduce the availability of child benefit, the personal allowance or the pension savings annual allowance.
Annual Tax on Enveloped Dwellings
Annual Tax on Enveloped Dwellings (ATED) can apply when a residential property with a value of at least £500,000 is held in an ‘envelope’. Broadly, an envelope includes a limited company, an LLP with a corporate partner or a collective investment scheme.
For any properties owned at 6 April 2019, unless the ‘envelope’ is a charity, a return will need to be filed by 30 April 2019 and any tax accounted for. In the case of a mid-year acquisition, a separate return must be filed within 30 days of purchase.
The ATED charge is based on the relevant property valuation. Relief from the ATED charge is available in many situations, including where the property is used for property development or as part of a Buy-to-Let business. It is important to remember, even if there is no ATED charge, a nil return may still need to be filed and the relief claimed to avoid penalties. It is the property value at 1 April 2017 that must be tested against the thresholds for ATED from April 2019. Properties must be revalued every 5 years or on certain other interim events.
Structure and Buildings Allowances
It was announced in the 2018 Budget that a new tax relief will be available for businesses (including property rental businesses) that incur capital expenditure on the construction or improvement of non-residential buildings and structures. The relief known as Structure and Buildings Allowances (SBA) will apply at an annual rate of 2% on a straight-line basis once the property has been brought into use.
The guidance issued in the 2018 Budget states that the relief will generally not be given for construction projects which began before 29 October 2018 and, in contrast to the tax relief which applies for fixtures in buildings (which will continue unchanged), there will be no balancing allowance or charge when the property is transferred (the new owner will claim the remaining relief) and the relief will reduce the base cost of the property for capital gains purposes.Read more in our Tax Planning Guide