Buy-To-Let, Another Twist On Company Ownership

You’re considering getting into the buy-to-let market. You’ve read that because of changes to the rules in April 2016 it is now more tax efficient to buy the property through a company. Is this correct?

Landlords Under Attack

The Chancellor has made no secret of his intention to increase tax on profits & capital gains made by landlords in the buy-to-let market. However, not all the changes which affect individuals apply to companies. This has fuelled the long running debate over whether or not residential buy-to-let properties should in future be bought personally or through a company.

What Are The Changes?

Since 2015 three major changes have been announced which affect the taxation of residential rental properties:

* The restriction of higher rate tax relief on loans & finance costs for individuals. This will be phased in from 6 April 2017. Companies aren’t affected.

* A 3% stamp duty land tax (SDLT) (LBTT in Scotland) surcharge applies from March 2016 to purchases of residential property by companies &, if it is their second or subsequent residential property, to individuals.

* Exclusion from the general reduction in capital gains tax (CGT) rates by 8% for gains made after 5 April 2016. This does not affect companies who are liable to corporation tax on gains.

Corporate Advantage?

As you can see the changes don’t hit companies as hard as individuals. Companies also have another advantage over individuals. When they sell a property & make a gain they are entitled to reduce the amount liable to tax to take account of inflation. This is known as indexation. On the other hand, getting the rental profits & gains out of a company triggers personal tax liabilities which can significantly reduce the amount you actually end up with.

A Guessing Game

Personal or company ownership is a tax conundrum which experts have been arguing about for a long time. This is because there are so many factors involved, any one of which can sway the outcome one way or the other. To name just a few:

* the rate of increase in property values

* inflation

* the rate of interest on money borrowed to buy the property

* how much other income you have?

In order to assess the consequences, you’ll have to predict each of these factors & more for the whole period you expect to own the property.

Conclusion:

Notwithstanding the above, one factor which might be a game changer is that since 6 April 2016 it’s been possible to extract property rental income & gains from a company at zero tax cost. By extracting money from the company as dividends of £5,000 per year or less, the tax cost will be zero. What’s more, if you’re buying a property with your spouse, unmarried partner or children (aged 18 plus), they too can share in the income & gains from the property rental company at zero tax cost.

The changes don’t automatically make company ownership a better option. However, a change in the general income tax rules from 6 April 2016 means that you & the other property owners can take up to £5,000 per year of income or gains tax free. This could tilt the balance in favour of company ownership.

For more information on the Tax services we provide, please visit our Tax Compliance services page here.

If you require more detailed information on these proposed changes & the potential impact it could have on you, then please contact us & we’ll be happy to help… Our client’s vouch for our service & we invite you to look at reviews from some of our customers on our website here, together with our featured page on ‘The Best of Thetford’ website.

Please note that Emerald Accountants Limited shall not be liable for any loss or damage arising out of the use of any of the information disclosed in this article…

Residential Property Income Tax Changes

Individuals who let residential property face a number of changes to their tax position in the next few years.

The Changes

Currently, letting residential property (even by individuals) is treated as a ‘property business’ for the purposes of calculating the taxable profit. Therefore, using normal business tax rules, interest paid on a loan to finance the purchase of a property which is subsequently let can be deducted 100% from the rental income received within the property business. For individuals who are landlords, the Government has decided to change this longstanding rule. In future, instead of deducting the interest from the letting profit before that profit is taxed, the individual will only be allowed an income tax deduction at the basic rate (20%) on the interest paid.

The Details

This is a major change for landlords, & the Government has stated that it does not wish to cause substantial short term disruption to the private rentals market. Therefore, the change will be phased in from the 2017/18 tax year, with transitional rules until 2020/21.

During the transitional years, the amount of the tax deduction from rents will reduce and the proportion of loan interest that will only qualify for basic rate tax relief will increase. In these transitional year’s landlords will be able to claim the following relief:

* 2017/18 - 75% of the interest against rents, 25% basic rate tax relief

* 2018/19 - 50% of the interest against rents, 50% basic rate tax relief

* 2019/20 - 25% of the interest against rents, 75% basic rate tax relief

However, any unrelieved interest can be carried forward to future tax years. HMRC have confirmed that the changes will have no effect where a property meets all the criteria to be a furnished holiday let.

What Are the Implications?

The change will likely affect higher & additional rate taxpayers who let out highly geared residential properties. Additionally, there are currently no proposals to change the eligibility criteria for tax relief on letting related borrowing. For example, it should still be possible to release equity on a buy to-let property by increasing the mortgage secured on it & still claim relief for all of the interest (albeit eventually only at the basic rate tax relief of 20%).

Individuals who currently pay tax at 40% or 45% on letting profits will pay more tax as a result of this change, although the increases planned for personal allowances & the basic rate band up to 2020 will help to mitigate the impact slightly. Landlords will need to consider these tax changes carefully when setting rent levels in future.

What Options Are Available to Mitigate the Tax Changes?

Ownership through a limited company could be a favourable option for some as the changes will have no direct impact on those who own & let residential properties through this method. Companies will continue to deduct loan interest as a business expense & get effective tax relief at up to 20% (although this will fall in future as the rate of corporation tax falls). However, by 2020, this change will remove the interest relief disincentive to holding buy-to-let properties through a company. Similarly, the ability to take income flexibly in the form of dividends will be more attractive to landlords who might otherwise lose their personal allowance. Of course, the effective rate of tax on dividend income has changed from 6 April 2016. Those taking low levels of dividends may suffer a lower effective rate because of the new £5,000 allowance, but those taking higher dividends may pay more as the rate of tax on dividends rises.

Conclusion:

As there are many issues to consider, deciding on the most tax efficient way to hold buy-to-let properties is not straightforward. The best option will depend on individual circumstances & long term objectives. Incorporation of an existing property letting business may not be practicable in many cases, including where this would result in a large stamp duty land tax liability.

For more information on the Tax services we provide, please visit our Tax Compliance services page here.

If you require more detailed information on these proposed changes & the potential impact it could have on you, then please contact us & we’ll be happy to help… Our client’s vouch for our service & we invite you to look at reviews from some of our customers on our website here, together with our featured page on ‘The Best of Thetford’ website.

Please note that Emerald Accountants Limited shall not be liable for any loss or damage arising out of the use of any of the information disclosed in this article…