June 25th, 2018 / Insight posted in Articles

Property Update – HMRC removes safety net for buy-to-let landlords

HMRC has removed a key safety net for individuals owning buy-to-let residential properties who wish to incorporate their rental businesses.

The interest tax relief restriction rules for individuals and partnerships who have invested in buy-to-let properties started biting in 2017. The solution investigated by many landlords was to transfer their properties into a company, i.e. incorporation.

However, incorporation of a portfolio that does not qualify as a letting business will trigger a capital gains tax (CGT) liability. While landlords and their advisers can make their own assessment of whether there is a letting business where potential tax liabilities are large, many used the HMRC Advance Clearance Service to obtain confirmation that HMRC agreed with their conclusions. This process ensured they got certainty about the tax position before any action was taken.

This clearance facility safety net has now been withdrawn. It is not clear whether this is due to lack of resources at HMRC, or the realisation that an important relief is being used in a way they perhaps had not anticipated.

Kingston Smith comment

Landlords now need to take an extremely robust and honest view when assessing whether their property portfolio constitutes a proper businessrather than a passive investment.

The review should include looking at:

  • the value of the property
  • the number of properties
  • the time involved in managing the properties
  • the level of income generated compared to other income (e.g. salary)
  • any employment commitments.

Getting this wrong could saddle landlords with significant CGT bills. This would be 28% of the capital gain from the date of purchase of their properties to the date they are transferred to a company.

Please do not hesitate to contact your partner at Kingston Smith or a member of our property team if you wish to discuss this, or any property related matter.