George Osborne announced a number of changes to the taxation of landlords during the summer budget.
The growth of the buy-to-let market has been helped by the relief on interest payments and any changes will have a profound effect.
A cap will be put on the tax relief on mortgage interest payments at the basic rate of tax (currently 20%). This will be phased in over a four year period from April 2017.
Currently, landlords can deduct the financial costs that come with let property from their rental receipts. As many businesses and self-employed individuals can claim business costs against tax, these changes will separate landlords from everyone else and will see them being put in an exclusive tax regime which is out of line with all other areas of tax.
Those landlords who have built a portfolio of properties, with the aim of investing capital growth into other properties, will be particularly hard hit by these changes. Landlords who own properties in both the residential and commercial sectors can move their borrowing ratios, allowing them to take advantage of the fact that these rules only apply to residential properties.
Those affected might wish to consider creating a new limited company to hold their property portfolio under and, as the limit on tax relief applies to individuals only, landlords can be protected by having their properties owned by a business, rather than an individual. Any profits taken will also be liable for tax, and the latest changes announced will make the taxing of dividends more expensive than previously.
The problems with holding your properties under a limited company
There are administration burdens that come with running a limited company which can cause problems with lending as banks often charge increased rates of interest to businesses on commercial property more than residential properties. In this instance, the tax changes will be the deciding factor.
When a property portfolio is transferred to a limited company, this often results in a hefty Capital Gains Tax charged based on the market value sale price, and this can become costly. When the property business is managed correctly, it can be treated as a business for capital gains purposes which means there will be a reliance on company tax relief.
This relief comes with a number of requirements, so it is crucial to look at these conditions in-depth as well as reviewing relevant property law.
Stamp duty land tax will also increase on the market value of the properties when a portfolio is transferred to a limited company. Relief may be available for multiple dwellings which can help to decrease the stamp duty land tax as it allows a method of ‘averaging’. This calculates the rate of stamp duty land tax across multiple properties as opposed to calculating a separate rate on each property.
Another possibility which could become more favourable is where the portfolio has been run as a limited liability partnership (LLP) as opposed to a limited company, because special rules are applied to transfers of land to and from partnerships which can lead to no stamp duty land tax being paid.
Essentially, the changes that have been proposed by the Chancellor will have an effect on the profits made from buy-to-let property investment. However, there is time to plan ahead so landlords, as well as advisors, must look at the implications as soon as possible to help ensure that healthy returns are still achievable.
Author: Javeed Baig
DISCLAIMER: This article should not be regarded as constituting legal advice in relation to particular circumstances. This article is merely a general comment on the relevant topic.
Published on 20th November 2015
(Last updated 28th March 2018)