Buy to let property, ATED returns, CGT on the garden

Land and buildings are a good source of tax revenue as they don’t move and their ownership is usually easy to determine. This week we examine the forthcoming changes to tax deductions for expenses relating to residential properties, a new filing regime for properties subject to the ATED, and a CGT trap when selling part of the garden.

Buy to let property 
Landlords holding residential property are beginning to wake-up to the increased tax charges they will have to pay when the changes to tax deductions, announced in the Summer Budget, come into effect. 
  
The first change is the removal of the wear and tear allowance from April 2016. This will apply to both individual and corporate landlords, and will increase the taxable profits from furnished properties by 10% at a stroke. 
  
Instead of the flat 10% of rents deduction, landlords of all residential properties (furnished and unfurnished) will be permitted to deduct the actual cost of replacing furnishings, free-standing appliances, carpets, curtains and other loose items provided in the property. This will align the tax rules between furnished and unfurnished properties. Note the initial cost of providing the furniture etc, won’t be deductible. 
  
The second major change is the removal of the interest and other finance costs as a tax deductible expense. This will only affect individual landlords, not companies. From 6 April 2017 the amount of interest deductible for tax purposes will be restricted to 75% of the amount paid. This restriction will increase to 50% in 2018/19, and 75% in 2019/20, and from 6 April 2020 100% of the interest will be denied as a deduction.    
  
In place of the interest deduction the landlord will receive tax credit equivalent to 20% of the restricted amount of interest. The following is a simplified example (ignoring other deductible expenses) of how the effect on a landlord who pays tax at 40% in 2016/17 compared to 2020/21.

Table 
  
The effect on individual landlords will vary according to the level of debt the lettings business holds. Your landlord clients will need tailored advice as to the likely impact on their business, and how vulnerable they are to rises in interest rates, which are also on the horizon. 
  
This is an
extract from our tax tips newsletter dated 3 September 2015
(5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>

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