Tax attacks on buy-to-let property
A furnished holiday let solution?
The new rules for let property involve the gradual withdrawal of income tax relief on finance costs (essentially loan interest paid), with effect from 6 April 2017. There is time to plan a strategy around commercial and income tax efficiency.
Pay off loans
One consideration for the “buy to let” landlord is to sell other assets (eg stocks and shares) which from 6 April benefit from the 20% rate of capital gains tax, and to utilise the annual CGT exemption (currently £11,100), in order to repay loans. Where there is a portfolio of buy to lets, the consideration is to sell the property which harbours least CGT and then repay part of the borrowings. The new 20% rate does not apply to residential property.
Clearly such a scenario is where investment advice and tax advice will merge and possibly conflict. Landlords must take good investment advice.
The LawSkills Monthly Digest
Subscribe to our comprehensive Monthly Digest for insightful feedback on Wills, Probate, Trusts, Tax and Elderly & Vulnerable client matters
Not complicated to read | Requires no internet searching | Simply an informative pdf emailed to your inbox including practice points & tips
Subscribe now for monthly insightful feedback on key issues.
All for only £120 + VAT per year
(£97.50 for 10+)
There is then the consideration of moving some of the property already held to furnished holiday accommodation in order to claim the maximum tax relief on the interest.
Furnished Holiday Letting
The owners of FHL property also consider that they have been persecuted. In 2009, the tax rules changed so that any losses on the FHL could no longer be offset against total income, but would instead be carried forward for allocation against the next FHL profits arising. While the inheritance tax (IHT) reliefs have also come under attack from HMRC, what has remained are the capital gains tax (CGT) reliefs.
One solution is therefore to turn the buy to let property into an FHL so that the restriction of tax relief on interest is less punishing. With the new rules taking effect in less than one year’s time (April 2017), planning needs to start now. One misunderstood point about FHLs is how positive the CGT position is. The disposal of the property can qualify for rollover relief, holdover relief and entrepreneurs’ relief. This could provide the disenchanted “buy to let” owner the way out they are looking for.
There could be rollover relief to sell the buy to let property into a qualifying business property which will involve the move from “letting” to business and possibly greater risk for the owner. However, many would argue that the buy to let industry is as complicated as other trading businesses. The advantage of a trade is that there will be other IHT advantages of business, eg business property relief (BPR). The other CGT relief available is holdover relief, whereby the FHL could be passed down to the next generation as a business asset.
With the move to the FHL for tax concerns, there would be many who would argue that they should qualify for BPR where there are strong services provided and an effective trade exists.
With such a punishing tax regime for “buy to lets” now and moving forward, there is no doubt that various tax planning strategies can be put in place to help the landlord. The move to FHLs can be used tax efficiently for both the interest payable on loans and also as an “exit strategy”. However, the commerciality and tax risk of holiday accommodation must be factored into the tax planning advantages. There are many “buy to let” landlords who are feeling like tax victims – no IHT relief, no CGT relief and now the move towards restricted income tax relief on interest paid. This article is just a sample of potential tax strategy surrounding buy to lets and the link to furnished holiday accommodation.
FREE monthly newsletter
Wills | Probate | Trusts | Tax | Elderly & Vulnerable Client
- Relevant learning and development opportunities
- News, articles and LawSkills’ services
- Communications which help you find appropriate training in your area