Considerations for investors
The news in last year’s Budget that the tax relief on buy-to-let mortgage interest was to be capped at the basic-rate, currently 20%, starting on a tapered system from 2017, has sent landlords into a spin as to what is best to do. At Lansdell & Rose, our specialist tax advisors have been focused on discussing with our clients the most tax efficient route for buy-to-let property owners.
The views expressed in this article are specifically those of Lansdell & Rose Accountants.
What are your options as a property investor?
For anyone who just pays tax at the basic rate then your tax position will be unaffected, although take care that the extra profits don’t push you over the threshold for higher-rate tax.
For everyone else, who would typically claim tax relief on mortgage interest payments at 40% or 45%, there are a number of options that can be considered here.
The first option is to suck-up the reduced tax relief, accept that the annual buy-to-let profits will be less, and focus instead on building the wealth equity in the property for a future sale and lump sum reward.
The second option would be to sell-up and focus your investments elsewhere. Whilst an option landlords are considering, many property investors relate to investing in bricks and mortar, and will be trying to find a better work-around than putting up the “for sale” sign.
Another option would be, to transfer your property or properties into a limited company structure, as companies are not to be affected by the new legislation. Companies are in fact subject to just 20% corporation tax and, it is due to be reduced to 18% by 2020.
Take care for CGT and Stamp Duty costs
However, it isn’t quite a straightforward win-win for the landlord. Should the property have increased in value since the individual/s acquired it, there will be a Capital Gains Tax (CGT) charge of up to 28% on any gain made. In addition, Stamp Duty would apply on the transfer for the company, as if it were a purchase.
So whilst transferring property assets into a company is an option to avoid the tax relief reduction, it could well be a very expensive option in other ways.
Another factor for consideration, the administration of a rental property for an individual is relatively pain-free, the only requirement being to provide basic information for self-assessment. Any limited company is required to file annual accounts and an annual return, which is not only additional admin, but added costs in accountant’s bills too – all which needs to be taken into account.
How to extract rental profits from a company
Drawing dividends from a limited company too will cause tax implications from April 2016 when even basic rate taxpayers will be subject to 7.5% tax, and 32.5% and 38.1% for top-rate taxpayers.
There will be a £5,000 tax-free band introduced from April too, but this is likely to not go a long way with regards to profit extraction.
Therefore, holding property within a company may only be suitable if you don’t need to access your cash on a regular basis.
Some investors who have a sufficient income stream from other sources may just choose to build up funds in a “buy-to-let limited company” as a pension pot – it’s an option.
In summary, there are many considerations to factor before deciding to move your property or properties into a limited company structure.
Realistically, given all the costs and the hassle it is likely to suit only those with a larger property portfolio, i.e. not just one or two buy-to-lets.
With complex planning of this nature though it pays to speak to an professional, someone who understands the ins and outs of the tax legislation and can provide bespoke advice based on your circumstances.
Start today – Contact the team at Lansdell & Rose to be sent a link for your free consultancy session. Or visit our website for more details.
Read more tax saving tips from Michael