Changes to tax relief for residential landlords

From April 2017 landlords of buy-to-let residential property will only be able to claim relief for finance costs at the basic rate of income tax. This applies to properties let by individuals or through a partnership. It does not affect landlords of furnished holiday lettings or properties let by limited companies.

If the loan is for a dual purpose, say for both residential and commercial properties, then the finance costs would have to be apportioned to calculate the residential property element.

This restriction is being phased in gradually from April 2017 and will be fully in place from 6 April 2020. During the transition period finance costs will be deductible but the amount will be reduced each year.

  Proportion of finance costs deductible from rental income: Proportion of costs available as a basic rate deduction:
2017/18 75% 25%
2018/19 50% 50%
2019/20 25% 75%
2020/21   – 100%

The calculation is quite complicated and if you are a basic rate taxpayer you may find that you are a higher rate taxpayer once the finance costs are disallowed. This is because it increases the rental profits. If you do become a higher rate taxpayer then you will lose the higher rate tax relief on the finance costs.

Increasing taxable profits may also have affects upon tax credits and if it increases income to over £50,000 it could result in the loss of child benefit.

Where income is close to the higher rate threshold then the landlord may wish to consider making additional pension contributions or gift aid payments to ensure that they remain under the higher rate tax band.

Changes to People with Significant Control

Last year Companies House replaced the annual return with the new annual confirmation statement which required limited companies to declare People with Significant Control (PSC) information. Where changes had occurred during the year, these could be updated on the confirmation statement.

However from 26 June 2017, new anti-money laundering measures mean any changes to PSC’s will need to be reported as they happen.  A company has 14 days to update their register and another 14 days to submit forms PSC01 or PSC09 to Companies House.

This is a significant change and directors/shareholders need to be aware of their responsibilities. If their accountant handles their company secretarial duties then they need to inform them promptly.

Should I be worried about IR35?

IR35 legislation has been around for many years and until now has been the responsibility of the contractor to determine whether they were within the rules on disguised employment. If they provide their services through a personal service company under circumstances where they would be employees if they had contracted directly with the client then they are caught by IR35 and subject to tax and national insurance on a deemed payment.

From April 2017 new legislation was introduced meaning that where the service is provided to a public sector employer, either directly or through an intermediary, then it will be the responsibility of the public sector employer to decide whether IR35 applies and inform the contractor or intermediary. It they deem that the contract falls within IR35 then they or the intermediary must deduct tax and national insurance and account working in the public sector or these through their payroll real time information (RTI) submissions.

Any contractor working for a public sector employer should now have been notified of their employment status. This will affect both the amount of the payment received from their employer (or intermediary) and also what travel expenses that can be claimed.

If they are affected then they need to assess the cash implications to their business.