The presentation given by Milestone Management Solutions Ltd.’s MD Tony Miles to address the recent changes to property taxation and what it means to you sole Trader and Partnership Property Investors.
The current Personal Tax rates are:
– Personal Allowance increased to £11,500 – 0% rate
– Basic rate limit increased to £45,000 – 20% rate
– Higher rate remained at £150,000 – 40% rate
– Additional rate over £150,000 – 45%
From April 2016 the Dividend Tax Credit was abolished and has been replaced with a new Dividend Tax Allowance of £5,000 for 2016/17 year. The limit was been reduced to £2,000 for the current year. Dividends in excess of this are taxed at 7.5% for basic rate taxpayers and 32.5% for higher rate and 38.1% for the additional rate taxpayers.
A further consequence of this was that shareholders that did not make an income tax payment on account (below £1,000 tax) were brought into the payments on account scheme from 2016/17 onwards, ie) bringing forward the period at which you pay tax.
This still remains below the main rates on income tax, it just makes the tax planning through dividend payment less attractive.
The cost of finance of property
New rules on the deduction of finance costs on rented properties have been introduced in the 2017/18 tax year, and tapered in over a 4 years, theoretically to give landlords time to adjust. The measure currently is to effect those that pay tax at a rate higher than the basic rate of income tax and will restrict the deductions of this type of expense to the basic rate. So in 2017/18 a 40% tax payer will only be able to claim 75% of their finance costs for a tax deduction at 40% and the remaining at 20%, The 40% rate reduces by 25% a year until it disappears in 2020/21 onwards.
Example – Change in calculation method
Then Now In Yr 4
Salary 45,000 45,000 45,000
Rental Income 15,000 15,000 15,000
Total income 60,000 60,000
Mortgage Interest (15,000)
Tax Credit (15,000) (7,500)
Total 45,000 45,000 52,500
Additional tax 3,000
It doesn’t stop there.
How many of you have got children either under 16 or in full time education? In this example because your income has increase by £15,000 you will loose your child allowance. This equates to an increased tax of £1,076 for 1 child, £1,788 for 2 children and £2,500 for 3.
For those with a student loan this situation is made worse. By increasing your student loan repayments by £1,350.
The total reduction of income in year 4 would therefore be, in this example, £5,850 for the same level of income.
So from April 2016
The level of Rent-a-Room relief, which excludes income from their only or main home, increases from £4250 to £7000 per year but you then can not claim any expenses against this.
Wear & Tear Allowance has been replaced with a new relief that allows all residential landlords to deduct the actual costs of replacing furnishings. Capital Allowances will continue to operate for landlords of furnished holiday lets.
For 2017/18 the main rate of Corporation Tax reduces to 19% for the next 3 years and falls again in 2020/21 to 17%, this will offset some of the effect of the dividend tax changes.
If you sell or dispose of a business asset, you will pay Corporation Tax on any profits at the rates above.
The scope of the Finance Bill 2017 that was published only last month has now been cut significantly so that the bill can be fast-tracked through Parliament and receive Royal Assent before Parliament is dissolved. The original bill ran to a mammoth 762 pages but following the Finance Bill committee stage debate on 25 April 2017, the Government deleted 72 out of 135 clauses and 18 out of 29 schedules. This resulted in the residual Bill being cut to roughly 140 pages.
This has been done to remove certain contentious items and to remove the risk of rushing through some key measures without time for proper due diligence. This includes the legislation for the introduction of Making Tax Digital (MTD) over which there had already been significant concerns that the timetable for the introduction of MTD was very tight. It remains to be seen if the plans for the introduction of MTD will be changed although the April 2018 deadline will be very hard to meet. This is good news to all Sole Traders & Partnerships.
The answer to the question “What should I do?” is it depends very much on your personal circumstances and where you plan to go on your property journey.
The changes that have taken place over the last 3 to 4 years have meant that you will need to sit down with your accountant to have a detailed conversation in relation to your own situation.
We have also identified that some accountants are actually charging existing clients for this service. So to be clear, for existing clients, we do not, it is all part of the service and your annual review.