UK residential property

The UK residential property market grown strongly in recent decades, not just in terms of property values but also rental income. The government has attempted to slow down the property market by implementing many changes in the UK tax legislation aimed at those owning UK residential properties. This article sets out the main changes to the UK tax rules and how UK residential property owners should approach the matter. 

Stamp Duty Land Tax 

Stamp Duty Land Tax (“SDLT”) is payable by the purchaser on UK land and property transactions. A surcharge which increased the SDLT payable by 3% of the amount paid for the residential property was recently introduced. For example, if £1million is paid for a property, the surcharge is £30,000. Therefore, the SDLT is £30,000 higher than it was under the previous rules. There are various exemptions from the surcharge but it applies to all properties acquired through companies. 

Income tax issues 

A rule has been introduced to restrict the tax relief on loan interest. This rule is gradually being phased in so it does not have full effect until the 2020/21 tax year, providing property owners time to consider their options. The restrictions on loan interest relief do not apply to properties owned by a company. 

Another valuable tax relief was the wear and tear allowance which was a flat rate deduction given for properties let furnished (generally 10% of the gross rent) and can no longer be deducted in arriving at the taxable rental profit. A new deduction was introduced for the replacement of domestic items. This is less generous than the wear and tear allowance, as the deduction is being brought in line with amounts actually spent. 

Inheritance tax issues 

With effect from 6 April 2017, a UK residential property owned via a non-UK structure is treated as if it were owned directly. This would have resulted in many owners of UK residential property starting to become within the scope of UK inheritance tax on 6 April 2017 and now should be the time for such owners of UK residential property to implement inheritance tax planning. 

The use of a more tax efficient alternative structure to acquire rental properties. 

The changes in UK tax legislation on UK residential properties has led to many UK residential property owners considering their options. There has been an increase in the number of UK residential property acquisitions via companies. Properties held via companies are not subject to the restrictions on loan interest relief so it suits those holding UK residential properties with large borrowings. 

For a non-UK resident person, the use of a company restricts the UK tax on rental income to 20% and dividend income can be extracted from the company with no further tax charge. 

UK commercial properties 

The abovementioned changes to loan interest relief, SDLT and inheritance tax do not apply to commercial properties. Therefore, UK property investors may start to give commercial properties more consideration as they are now more tax efficient than residential properties.

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