Welcome to the May 2018 newsletter from Chamberlains
General Data Protection Regulation (GDPR)
You’ve probably been getting lots of emails about this and you’ll have gathered that it comes into force on 25 May 2018. We need to tell you about how we deal with information that we hold about you and to remind you that you can unsubscribe at the bottom of this newsletter or email me direct to say what you’d like to happen. As you probably realise, I send this newsletter to clients and selected contacts, most, if not all, of whom have said that they’d be interested in receiving it. If you’d like me to stop sending it, just let me know.
In order to carry out our role as accountants, Chamberlains keep quite a few details about our clients, but of course we’re very careful about privacy and confidentiality. Our formal Privacy Notice is on our website here. For non-clients we just keep basic contact details and again, we’re very conscious of, and careful about, confidentiality. We might pass on details of another professional or advisor if someone asks for a contact (“Do you know a good financial advisor?”) but that’s about all. Most of our data is kept in the Cloud (on an external computer server in the UK and strongly passworded and in a secure, high-tech security ex MoD bunker); hard copy records are under lock and key. We’ve even made our cleaner sign a confidentiality agreement, just in case!
PROPERTY RENTING – WHO’D BE A LANDLORD?! (Part 2)
Last month I spent quite a while talking about residential property investments, how profits are taxed, and changes in the way that mortgage interest can reduce the tax payable. You can find it here. I said that I’d carry on this month with something about investments through companies and other property-related matters.
I mentioned that our local MP, Jeremy Hunt, made a somewhat controversial investment through a company – but why a company? One reason might have been because loan interest continues to be fully tax-allowable against rental income in a company, and company profits are only taxed at 20%. We know that Mr Hunt is one of the richer members of the government, thanks partly, so we are told, to his entrepreneurial venture into an online database to help people decide which university to choose (Hotcourses – I understand that it was sold last year). A bright chap, evidently. His MP’s salary will give him a high enough income to pay at least 40% tax, and his other interests quite possibly get him into 45% tax if his income is above £150,000. But if he keeps his rental income in a company, corporation tax is paid at only 20%. He then needs to work out how to take his income from the company, but this is automatically shared with any other shareholders, maybe his wife for example, or he can simply leave it in the company until the tax laws change again…
Other people are wondering whether to put their property portfolios into a company to benefit for the better treatment of interest. Well, maybe… NB – it doesn’t help with the extra 3% stamp duty problem – see below. But there are a few things to consider. Firstly, a transfer into a company is treated as a sale at market value – so there can be tax to pay on an immediate capital gain, even though you’ve received no cash for the sale. OK, the transfer value is the new base cost within the company, so eventual CGT in the company is reduced, but there’s an immediate cashflow problem. If you spend quite a bit of time on your property – 20 hours per week is suggested – it may be possible to claim that it’s a business rather than an investment, and CGT may be deferred. But that’s not the case for most people.
The other main point is that the bank will almost certainly take the opportunity of charging you a higher rate of interest if the loan transfers to a company. So it’s not clear that this is the route to go. On the other hand, perhaps this would be a good idea for any new rental properties that you buy – which perhaps was what Jeremy Hunt decided (even if his accountants didn’t quite manage to get the paperwork right!) As is normally the case, tax is just part of the decision-making process, and you shouldn’t let the tax tail wag the commercial dog!
EXTRA STAMP DUTY
But what of the extra 3% stamp duty when you buy the property? This was brought in from 1 April 2016, and it effectively increases the cost of any residential property other than your first. Note – it applies to all properties bought by a company. If it’s an investment property, it’s included in the cost, so you make a smaller capital gain when you sell it – so it’s not just lost. But it’s quite restrictive: if you or your partner have another residential property (even abroad), you have to pay an extra 3% stamp duty when you buy the next one. (Technically, it’s now called stamp duty land tax – SDLT.) This can even catch people who are just moving from one home to another – the extra 3% is payable if you haven’t sold your first home – just what you need if things have gone wrong and you’ve had to get a bridging loan! However, it’s recoverable if you sell the first home within 3 years. Solicitors are still getting used to this new system, and we had one client, a building developer, who lost out by £27,000 because of the solicitor initially getting it wrong. Very grumpy!
As we know, it’s hard for first-time buyers, and in last November’s budget the government made an SDLT concession for people buying their first house. They pay nothing up to £300,000, and then they pay 5% up to £500,000. (More expensive houses aren’t eligible.) Under normal circumstances they’d have paid 2% between £125,000 and £250,000, and then 5%. So this could save them up to £5,000. However, they’re ineligible if they’ve previously owned even part of a property. If they’re buying with someone else, their partner or spouse for example, if he or she has previously owned a property, neither is now eligible for the concession.
CAPITAL GAINS TAX AND HOUSES
Capital gains tax on everything except residential properties is 10% so long as your total income (including the gain) is within the basic rate band, or 20% thereafter – very generous, really. CGT on houses is at 18% or 28% – still not too bad. It’s calculated on the selling value minus the original cost, minus any other costs that relate to the purchase or sale (eg. stamp duty, solicitors and estate agents fees, etc.) You can also include any significant improvements to the property as part of the cost, so you could include an extension but probably not a kitchen make-over.
However, if you’ve ever lived in the property, there are even more generous allowances, and these increase if you rented it out. In very rough terms, the capital gain is calculated on the overall increase in value between purchase and sale, but it’s reduced in proportion to the amount of time you lived there – plus the last eighteen months when you are assumed to have lived there, even if you didn’t. And then there’s an extra allowance, up to £40,000, for the time when you rented it out. It’s a complicated calculation, so probably best to ask me!
If the property is held within a company, the gain is taxed within the company profits at 20%, and the calculation’s a bit different. It’s still basically sale proceeds minus cost, but until recently you could also claim a deduction for inflation, so it’s a bit more complicated. Something for the accountant to worry about!
CGT TO BE PAID EARLIER ON PROPERTY DISPOSALS IN 2020?
As yet another attack on buy to let landlords, HMRC are wondering about getting in their money earlier. There’s a consultation going on about having to pay the CGT within 30 days of the completion date of selling a residential property. This would be from April 2020, so this is planned to be instead of the normal payment date of 31 January following the end of the tax year. This is already the system for non-UK residents, so there’s a precedent. It’s a headache for solicitors because they don’t normally deal in CGT, but they’ll probably be the ones having to deduct and pay on the tax. They won’t necessarily have all the information about costs or other income (other income affects the amount of tax to be paid), so their calculations will probably be a bit broad brush (probably too much tax will be paid as a precaution) and we’ll need to sort out the exact position when we do the tax return later.
There are other things I could explain, but that’s probably enough for this month.