AAB: Tax planning matters for property landlords post-pandemic
The last year has seen many changes across every aspect of everyone’s lives and property landlords are no exception. With an ever-changing landscape of legislation, this area of the property sector has had a lot to consider and with which to comply.
Anderson Anderson & Brown (AAB) explored some of the key challenges facing property landlords in a ‘Planning Matters Post-pandemic’ webinar with legal firm and estate and leasing agent, Aberdein Considine.
AAB’s Jill Walker and Lynn Gracie, both private client directors, and Stuart Petrie, director at AAB were joined by Adrian Sangster, leasing director at Aberdein Considine.
Together, the team discussed the effect of Covid-19 on the property industry and the tax planning measures property landlords, based in the UK or overseas, can take to help now and in the future.
Our property landlord clients told us the top areas they wanted more information about included tax rules and advice, the impact of new rules and a reflection on the market.
The team has summarised some of the key points under each of these headings below.
Capital Gains Tax – 30-day reporting period
When a UK residential property is disposed of, the disposal, plus any related Capital Gain Tax must be reported and paid to HMRC within 30 days. Despite this ‘new’ rule being implemented from 06 April, 2020, it is still widely ignored.
HMRC has easy access to full details of all UK property disposals and has been issuing a large number of penalty notices where the 30-day reporting has not been made. There are penalties for late reporting, regardless of there being any gain or tax payable on the disposal. It is an important area to be aware of and discuss with your advisor ahead of any transaction.
Full restriction to tax relief on finance costs or mortgage loan interest
Previously, full tax relief could be claimed on all mortgage loan interest paid by higher rate taxpayers, on properties rented out. Over the past four years this percentage allowable for tax relief has reduced gradually each year.
This all changed on 06 April, 2020. Now, the full restriction to higher rate tax relief applies, leaving only a basic rate tax credit available to set against rental profits. In some cases, this can mean that the personal taxes payable on rental income double.
A range of matters should be considered here in order to try to negate the potential large increase to rental profits and associated tax liabilities. For instance, can the property ownership be shared to take advantage of lower tax band availability? Are all other allowable expenses being claimed in order to reduce rental profits? Are other income generating assets held in the most tax efficient manner?
Finally, if little else can be done, is the simple answer to consider a re-structure of any debts over your properties?
Incorporation of residential property portfolio business
Despite the rules mentioned above applying for higher rate taxpayers, companies can still claim full tax relief on finance costs or mortgage loan interest.
In view of full restriction of mortgage interest above, one of the most common questions we are asked by clients is, “Should I incorporate my property business?”, that is, move the properties into a company. The answer is always, “It depends.”
The reason for this is that we need to consider numerous areas, including:
- The short and long terms goals of property owners
- The potential tax transaction costs of moving the properties into a company
- The annual personal tax costs of removing the funds from a company
- Any potential double tax cost of a future property sale in the company, with a withdrawal of the funds thereafter.
There are too many variables to provide a ‘one size fits all’ approach to tax planning.
That said, after considering the impact of all of the areas mentioned, we will be in a good position to identify the best approach based on individual circumstances.
AAB has been able to prove substantial tax savings over a prolonged period where the individual’s personal circumstances, and property portfolio ownership and values, dictate it is the correct thing to do.
Despite Covid, property rents in almost all of Scotland’s major cities – Glasgow, Dundee and Aberdeen – increased in the past year, with the sole exception of Edinburgh.
Edinburgh still has the highest average rent compared to all other major Scottish cities, so it’s not all doom and gloom for property landlords.
Another question we are asked regularly is, “Is now a good time to buy or invest?” Again, the answer is always, “It depends”.
It depends on the type of property in question and goals for the purchase. For instance, is this a long-term investment or a quick turnaround?
Understanding what you ultimately want to achieve will always help answer questions around timing, along with taking a holistic view of the market itself.
Typical trends we have seen over the last 12 months are centred around more space being desired, along with less time in city centre offices and a move for people migrating to more suburban, out-of-town living.
Now could be a good time to invest in property while lower values still exist in pockets of Scotland, but it really does depend on your long-term goals and individual circumstances.
Looking ahead, we would hope to see a period of relative stability across the property market, but as these past 14 months have shown, anything is possible.
You can watch a recording of AAB and Aberdeen Considine’s “Planning Matters Post Pandemic” webinar here.