Tax Changes to Buy to Let In the Budget & Work Arounds
Ever since the budget landlords have been trying to figure out a work arounds the changes which will limit the amount of tax relief they can claim on mortgage costs.
Tax Changes to Buy to Let In the Budget & Work Arounds
The Chancellor has restricted this to the basic rate of income tax, which is 20pc currently.
This restriction will be phased in over four years, starting from April 2017.
It is a bit of a hit to landlords with larger incomes (at or near to the higher rate of tax) who also have buy to let mortgages, as they could until now claim relief on interest payments on relevant loans at their personal tax rate. So, for a 45pc taxpayer, every £100 of mortgage interest they paid cost just £55 after claiming tax relief, but this will rise to £80 when the changes are fully implemented from April 2020.
But it could also hit a lot of basic rate taxpayers who, as a result of the way the new system will work, may well find themselves pushed into paying more tax and into a higher rate -effectively paying tax even though their properties make nil profits.
Tax experts say one way around the problem is by investing through a limited company.
You don’t have to own a vast portfolio of properties to benefit from a corporate structure. Just one is enough and you’ll be able to reinvest the profits at a lower tax rate if you do find you want to add to your portfolio later on. But if you already own an investment property, however, transferring it to a company could cost more than it’s worth.
Buy to Let Tax Work Around
If the properties were held in a company the landlord would pay the 18pc corporation tax rate (it is 20pc currently but will fall to 18pc from 2020).
Landlords can also take profits from the company as dividends and even the rise in the dividend tax, (also announced in the budget), will not outweigh the savings. From April 2017, only the first £5,000 of annual dividend income will be exempt from tax. Above this amount, basic-rate taxpayers will pay 7.5pc, higher-rate taxpayers will pay 32.5pc, additional-rate taxpayers will pay 38.1pc.
For landlords who want to grow their portfolio it would be even more tax-efficient to hold the properties in a company, not distribute dividends and then reinvest the profits.
But with tax, it is never all plain sailing and there are other factors to take into consideration.
For starters, there would be a personal income tax charge if you wanted to take money out of the company, levied at your personal tax rate. And when you wanted to sell the properties, corporation tax would be due on the profits. When you close the company you could take out any excess money as a capital payment but capital gains tax (CGT) would be due (though this would apply on selling the property even if you hadn’t used a company structure).
Buy to Let Mortgage Products for Company Set-Ups are Fewer
There are fewer mortgage products available to companies than individuals, and as a result of this (less providers = less competition on rates), interest rates are generally worse. Don’t hold your breath waiting for the mortgage lenders who don’t currently do mortgage loans to company structures to suddenly innovate and start doing it either (though in time they may seize the opportunity and the extra competition may drive down rates).
If you already own properties it is not easy to transfer them into a company. This can be considered a disposal for CGT purposes, so you could face a tax bill. There would also be a potential stamp duty charge.
So, you see, there are work-arounds, but there are drawbacks too.
A very simple solution, which is available for all, is to transfer the property to a spouse if that spouse is a non taxpayer and if the move of income to them means they still stay under their personal allowance limit. This is certainly worth looking at.
I will be discussing all this and more ideas with tax expert Stephen Fay at our evening event on 7th October. Join up now – follow the link.
See also petition against the tax change – below in comments. Worth adding your name to this.
Services to Businesses and the Public Sector
We advise a range of organisations including banks, building societies, local authorities, social housing providers, institutional investors and insurers. We help them develop and improve their services and products for private landlords.
David Lawrenson, founder of LettingFocus also writes for property portals, speaks at property events and is regularly quoted by the media.
Services for Private Landlords
We help landlords and property investors by showing them how to make money in the private rented sector using ways which are fair to tenants and which involve minimal risk.
HOME PAGE OF THIS BLOG: Blog
THE HOME PAGE OF THE MAIN SITE: http://www.LettingFocus.com
For general information on our CONSULTING SERVICES and also to find a small sample of links to where our comments have been featured in the National Press: Consultancy and Seminars
For ONE TO ONE PRIVATE CONSULTANCY FOR PRIVATE LANDLORDS: Property Advice
CLIENT TESTIMONIALS – from both organisations and private landlords: Testimonials
BUY “SUCCESSFUL PROPERTY LETTING”
Our book is the highest selling personal finance and property book in the UK. Click here to Find Out More and Buy it.
If you are from an organisation and would like to bulk buy, please ask us for special rates.
TO JOIN OUR FREE NEWSLETTER Mailing which goes to over 3,750 people (as at Jan 2015) just send an email to [email protected]
We do not send spam or sell our mailing list to advertisers, though we occasionally mail landlords about good products from third parties. Please put us on your “white list” to ensure you receive our emails.
OFFERS ON PRODUCTS FOR LANDLORDS and TO ADVERTISE YOUR PRODUCTS to LANDLORDS: Landlords Resources
PERUSE LAST TEN BLOGS BY GETTING THE RSS FEED: Click Here
NEXT SEMINAR EVENTS FOR LANDLORDS: Landlord and Property Letting Seminar
Copyright of Blog: David Lawrenson 2015. Please link to us here or quote us. We actively pursue copyright infringements. The blog is updated roughly once a week.
IN THE MEDIA: Recent press coverage
TWITTER PAGE My thoughts on property, personal finance, plus a lot of other random things: Twitter