For individuals who own and let out residential property the tax landscape has changed significantly over the last 12-18 months. Firstly we've seen the abolition of the 10 per cent wear and tear allowance to be replaced by what is probably a less generous replacement allowance. Secondly, although capital gains tax rates have generally fallen, whether it relates to the disposal of residential property it remains at 18 per cent and more likely 28 per cent. But thirdly, and probably the most significant change, relates to interest on borrowing to acquire or improve residential property, going forward the tax relief is going to be significantly restricted.
So why are these issues important? It's likely that between now and 2020 individuals are going to see a significant increase in their tax bill, and if we have higher interest rates in that same period it could well be a double whammy.
Going forward instead of individuals getting relief at their marginal rate of tax which is currently maximum 45 per cent, it is going to be replaced by tax credit of basic rate tax which is currently 20 per cent. As an example, if you’ve got someone with a highly geared portfolio they could well end up with an economic loss on the letting of that property but still have an income tax charge, in addition it could affect an individual's personal allowance, and also child tax credit.
So what are the next steps? Firstly you should consider what the implications are of these tax changes on your individual investment portfolio, but secondly is important to consider whether the current structure in which you hold those properties is the most appropriate commercially in the longer term. For further advice or to discuss your options please contact RSM