3 May 2022

Getting your house in order: Property Investment Business

Property continues to be one of the most profitable investments individuals can undertake, even after the turbulence of the past two years. According to a forecast by Savills, the next five years expect to see residential property prices to rise by 21.5%. Of course, this is just a forecast and if we have learned anything during the pandemic, it’s important to be prepared for almost anything.

Nevertheless, despite being an extremely profitable market, there are considerations which residential property investors, current and prospective, must be aware of. There are many hidden dips in the landscape whereby individuals can get financially stung if they aren’t careful.

Tax relief for mortgage/loan interest for residential landlords
In April 2017, the Government took the decision to change how tax relief for buy-to-let investors was calculated and have phased in the changes. Since April 2020, the amount of income tax relief landlords can get on residential property finance costs has been restricted to the basic rate of tax. This has meant that not only do higher and additional rate taxpayers miss out on tax relief, the way in which rental income is not calculated may push taxpayers into higher earnings thresholds.

This could then create knock-on effects to other financial advantages, such as personal allowances, pension savings annual allowances and child benefit.

Annual Tax on Enveloped Dwellings (ATED)
Initially brought into effect in 2013, ATED was introduced to make it less attractive to hold high-value UK Residential properties indirectly, potentially minimising certain taxations such as Stamp Duty Land Tax (SDLT).

Broadly, an envelope includes a limited company, Limited Liability Partnership (LLP) or a collective investment scheme.

Where a residential property with a value of more than £500,000 is held indirectly, and not by a charity, it is liable to file a return and face potential taxation. Costs can reach up to £244,750 dependant on the value of the property (chargeable amount from 1 April 2022).

Additionally, every five years, properties which may potentially fall into ATED rules must be revalued. 2022 is the next year for revaluation and because of the current spike in house prices, it is likely that many people will either need to pay a significantly larger sum for their enveloped dwellings or may be pushed into a taxation band despite not needing to pay previously.

To learn more about ATED, please see our recent article here.

Structure and Buildings Allowance (SBA)
In October 2018, SBA was introduced by the Government to give support to businesses that underwent the construction or improvement of non-residential buildings and structures. This relief can be claimed on anything from fees for design, preparing sites for construction through to fitting out works. The applicable rates for SBA are as follows:

Corporation tax

  • 29th October 2018 – 21st March 2020: 2%
  • 1st April 2020 onwards: 3%

Income tax

  • 29th October 2018 – 5th April 2020: 2%
  • 6th April 2020 onwards: 3%

However, as you may see, this relief is not applicable to any construction projects that began before 29th October 2018.

60-day reporting
Since 6th April 2020, individuals, trustees, and personal representatives who realise a taxable capital gain from the sale, letting or other disposal (such as a gift) of a residential property must report this to HMRC and pay within 60 days of completion – this cannot only be submitted via an annual tax return. This was previously 30 days, but it was doubled in October 2021.

A return is not required if the capital gains are not taxable – if they are covered by residence relief, for example. However, if capital gains tax must be paid and the deadline is missed, the risk of heavy fines by way of penalties and interests are very likely, so submitting on time is crucial. Please note, there are different rules for non-residents therefore please speak with one of our advisors if this applies to you.

Jessica Hunt