Taxation of Buy-to-Let Properties01 Nov 2017
In 2015 the UK Government set out its Five Point Plan for housing which was designed to stimulate housing supply and encourage first-time ownership. Support such as this was welcomed by many as the impact of the global financial crisis, and the critical effects this had on the property development sector, continued to be felt by first-time buyers as they battle astronomical rents and house prices worsened by low salaries.
Alongside the introduction of affordable homes, and enhancements to the Help to Buy scheme, the Government has over recent Finance Acts introduced a number of tax changes imposed on buy-to-let investors presumably with the intention of deterring investors from investing further, which the Government believes will free up property for owner-occupiers.
Some of the policies introduced have now been in action for over 12 months, whilst others are just beginning to bite as buy-to-let landlords come to file their personal tax returns for 2016/17.
We look at the key changes below:
Removal of Wear & Tear Allowance (Furnished Properties)
From April 2016, the Wear and Tear allowance (10% of gross rents, less any costs borne by the tenant which would normally be paid by landlord) was removed in an effort to make claims easier to administer. Landlords can now only deduct costs that have actually been incurred, which in most cases will result in a reduction in the claims, and an increased administrative burden.
SDLT Surcharge for properties over £40,000
Effective for all sales completed on or after 1st April 2016, an additional 3% charge is now added to the current SDLT residential rates on the purchase of additional properties where the consideration exceeds £40,000, which significantly affects a landlord’s bottom line. This surcharge no doubt has played a significant part in the jump in SDLT receipts seen over the last 12 months. In the period between April and September 2017, Stamp Taxes receipts were 13.4% higher than in the same period in 2016.
Cap on mortgage interest relief
Starting from April 2017, the restriction on income tax relief on property finance costs has begun to be phased in, ultimately reducing deductions in respect of finance costs to the basic rate of tax (by 2020) for individual investors. As a result, profits will be artificially increased for tax purposes, and many landlords could find themselves pushed into a higher rate of income tax or, in some extreme cases, suffering losses despite their income in real terms not having increased.
It is always encouraging to see the Government taking steps to control a crisis, and evidence shows that the steps that have been taken to date are beginning to improve market conditions for first-time buyers, however, it is clear that this improvement has come at the detriment of individual buy-to-let investors, and ultimately, their tenants who may well find rents being increased in the foreseeable future as the full force of each new restrictions bites.
It is therefore not surprising that Buy-to-let investors are now looking for ways of controlling the impact of these restrictions, and many are now considering restructuring the ownership of their property businesses. One example of this is moving the property business into a company, by incorporating it.
The benefits of incorporating a property portfolio, if the circumstances are appropriate, can include.
1. Corporation Tax becomes payable on taxable rental income rather than personal tax. Corporation Tax is currently 19%, reducing to 17%, and so is much lower than income tax rates which could be payable of up to 45%,
2. The availability of indexation allowance when calculating gains,
3. The ability to regulate profit extraction, which will allow the individual(s) to protect their allowances and pay income tax only on the amount of income they need to withdraw from the business.
4. The cap on mortgage interest relief does not currently apply to companies, so loan interest can be deducted as a business expense without the same restrictions suffered by individuals.
Transferring a rental property business to a company can also be done more efficiently than most people assume, and properties may be transferred into a company (where the circumstances permit) without necessarily triggering CGT or SDLT, which would typically be the two main taxes to consider when embarking on this route.
Whilst there are clear benefits and savings which incorporation of a property portfolio can achieve, the extent of any benefit is dependent on each owner’s individual circumstances and future intentions. The professional costs of incorporating must also be considered as they can be significant. So, if the business owner needs to distribute income regularly, or intends to sell properties in the near future, the effective rate of tax could be commensurate with that which would have been paid had the shareholder received the income directly, and so may not be right for that owner.
Alternatively, if the owner intends to hold on to their properties for the long-term, seeking reinvestment and growth, without the requirement to distribute all the profits of the business, then incorporation could very well be the most tax efficient option. In either case a discussion with your accountant or advisor will be necessary before any decision to incorporate should be taken.
On the 8th November 2017 we will be hosting a webinar to discuss the issue of mortgage interest relief and restructuring a property business. Please click the link to register if you’d like to join.
If you would like to discuss the tax changes and the effect that they might have on a client’s tax position before then please contact us directly on 0113 827 2172.