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.

 

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11 comments

  • Hi David

    Think my plan is to make sure I reinvest in enough repairs to make sure I don’t hit the 40% tax bracket, thus all funds go into improving the houses and increasing my investment value

    Also when you sell properties from the Ltd Company you can apply the Retail Price index increase to the original purchase price so you get some/all of the increase in valuation tax free.

    Will talk soon

    Andy

  • ‘It is a bit of a hit to wealthier landlords with larger incomes, as they could until now claim relief at their personal tax rate.’

    ACTUALLY IT WINT AFFECT THE WEALTHIER LANDLORDS, AS OF COURSE WEALTHIER LANDLORDS DONT HAVE MORTGAGES. THE MOST AFFECTED ARE THOSE WITH BIG MORTGAGES!

    ‘But it could also hit basic rate taxpayers who may find themselves pushed into paying more tax and into a higher rate because the income from let property will, when the new rules come in, be added to their other income.’

    BASIC RATE TAX PAYERS WILL DEFINITELY BE PAYING MORE IF THEY HAVE A BTL MORTGAGE ONCE THE CHANGES START TO BE PHASED IN (AND BTL INCOME HAS ALWAYS ‘…BEEN ADDED TO OTHER INCOME…’, THAT ISNT WHAT WILL CHANGE).

  • Thanks Andrew,

    The article was intended as a very rough guide.

    There are many other tax mitigating strategies that Stephen Fay discussed at the seminar.

    In reply to your last point, how it is “added to other income” will now differ from before……
    In essence, the way it will work from 2018 is that finance interest will be added back in after you calculate tax due on “pre-finance profit” PLUS other income . Then, once that is done, you get an allowance of 20% of finance interest against tax due.
    Hope that clarifies,
    D

  • HI David,

    Thanks for publishing my post and your reply.

    However, I wasnt seeking clarification as (I think) I understand these changes.

    Unfortunately there seems to be some misunderstandings that these changes will only affect the rich/ higher rate tax payers. this is NOT the case and thank you for allowing me the opportunity to clarify that point. the affect of limiting the amount of mortgage payments that can be used as a tax deductible expense will obviously be to increase taxable profits, and thus the amount of income on which tax is due and thus increase the amount of income tax due! for many this will push them into the next tax bracket (as you did indeed point out) or even leap frog tax brackets to the highest. You dont have to be wealthy for this to happen…the only requirement is that you are indebted with mortgages which is a very different thing!

    I believe landlords need to unite against this unfair and unprecedented tax change. There are a few petitions about this and it would be great if you could publicise these, eg:

    https://petition.parliament.uk/petitions/104880

    http://www.property118.com/landlords-say-no-to-george-and-his-alice-in-wonderland-tax/79614/

    http://www.rla.org.uk/landlord/lobbying/tax/index.shtml?ref=current-activity

    I think you may have misunderstood my point about ‘other income’. Please note the point I was making is that BTL income is always added to ‘…other income…’, i.e. in order to arrive at total earnings and thus total income tax due. This is nothing new. The problem isnt this but the reduction in using legitimate cost of mortgage interest as a taxable expense. please therefore encourage readers to sign the petition.

    • as my last post is still awaiting moderation i shall be unsubscribing.

      • Um, OK, Andrew, we can take you off our mailing list, if that is what you would like, but we have approved all your comments, updated the text of our own blog post on this issue to reflect your input and we have even put the link to the petition (in our reply of 14/10/15) as you requested.
        This is all showing up on our PC and we have checked visibility on other readers too.
        It IS all visible in our text and in my replies.

        Have you updated your cache? Maybe that is the problem at your end (i.e. if you still find you cannot see the comments and updates?).

        Kind regards
        D

  • hi david

    i refreshed prior to unsubscribing and it was still showing ‘awaiting moderation’. dont think something at our end as the awaiting moderation is now gone…but im no IT expert.

    there are a lot of strong arguments why this tax is going to be bad for:
    – tenants (supply down and rents up)
    – landlords (taxed out of existence in many cases)
    – collapsed property prices (repos and forced sales…only good for FTB if they can get mortgage) or alternatively prices will be supported by growth of corporate landlords
    – developers (no Landlords buying)
    – anyone connected with maintenance/ refurbs (as affected landlords will have no money to invest in repairs)
    – etc etc
    – and ultimately the economy as a whole.

    anyway thanks for publishing. no need to unsubscribe me.

    • Thanks Andrew – many good comments there
      I certainly agree with all these.

      I also wonder if this new tax shift is only good for one group of people – the institutional investors – who now have a tax advantage over small scale landlords.
      I have been saying to a long time that govts (of both left and right) have been “got at” by the likes of Aviva and L&G who are desperate to get in on the private rented sector – and have done a great job of persuading those in Westminster that they are great and their product is great and that the Mom and Pop landlords are all awful.

      I have argued many times on this post why their arguments do not stack up – and why their product, is in most cases, more resembling something that Mr.G Ratner might describe in one of his more colourful comments about his own jewellery.

      Will put you back on our mailing list

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