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Sage self assessment summit: Part 4 – Buy-to-let

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5th Jan 2017
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In the fourth section of this series on self assessment traps, our experts examine the ever-changing world of buy-to-let properties.

Serialised in eight parts, the Sage self assessment summit webinar features tax experts Rebecca Benneyworth and Paula Tallon outlining the main tax traps of the upcoming self assessment season, why they’re important and how to tackle them.

To watch the full webinar, including additional audience questions, click on this link and register absolutely free.

Topic 4 of 8: Buy-to-let

While practitioners may not be burdened with masses buy-to-let work on clients’ self assessment returns, the area has become a real headache as accountants strive to stay on top of the new legislative changes coming in so they can advise their clients.

From 2017 there is going to be a restriction on interest relief, so instead of interest going against the rental costs it’s going to go in as a tax reducer instead.

Slide away

As shown in the slide above this is going to be phased in, and on the face of it if the client is getting basic rate relief a lot of practitioners believe that there is no change for basic rate taxpayers. However, because it is coming in as a tax reducer that means some basic rate taxpayers could now end up as higher rate taxpayers.

Here are a number of examples of how this could work:

Example 1

In this first example a typical client, Mr X, has a small buy-to-let property in order to top up his pension pot. There’s not going to be a significant change in the effective rate of tax, so he’s just going up by 1%.

Example 2

However, Mr Y has a more substantial rental income. If we compare the situation from 2016/17 to what it’s going to be in 2020/21 when the changes come in, the effective tax rate has gone from 29% up to 38%. Practitioners may have clients who are financially making a loss or breaking even on their rental properties, but still have a tax liability.

Example 3

This example shows that the restrictions for somebody who has rents of half a million, the rate is going from 38% to 69%.

Accountants may well have had clients asking ‘can I incorporate my rental property?’

Example 4

This is an example of how it is going to work. Using the client from the previous example (Mr Z), their tax rate could come down to 40% by incorporating.

During the webinar Gabelle’s managing partner Paula Tallon urged caution to practitioners whose clients are coming to them asking “I’ve read in the paper or on a website that you can just incorporate, I can claim incorporation relief and I don’t pay any SDLT”. In some cases that is correct, but not all.

If accountants have clients that want to incorporate their property portfolios, they need to be looked at on an individual basis to see whether or not they can claim incorporation relief, and in order to do that they need to have a business; one property is unlikely to constitute a business.

Also, if the client has a partnership going into a company they should be able to get around the SDLT and land a zero percent SDLT rate. However, if they have jointly held properties they will not fall into those rules, will have SDLT and will be paying the additional 3% SDLT as well.

According to Tallon, if clients are looking for advice on incorporation the best thing is for them to come back after self assessment season, sit them down and talk to them properly about what they can and cannot do.

 

You can view other topics covered in this series such as marriage allowance and PPR by visiting the content series page, or watch the full Sage Self Assessment Summit by registering here.

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