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Did you know…more than 100,000 landlords made property purchases through Limited Companies last year. There are many reasons that landlords may have chosen to plan in this way, including;

  • Tax efficiency with rental profits being taxed at 20% Corporation Tax rates. Rates are expected to fall to 17% by 2020!
  • Succession planning – it’s much easier to plan with company shares than give away portions of physical ‘bricks and mortar’.
  • To retain the benefit from mortgage interest rate relief in a company when the Government changes for individuals comes into force in April 2017. It is thought that the mortgage interest relief changes could affect over half of all UK landlords.
  • Inheritance tax planning – A recent survey of 2,517 landlords found that 61% of property in the UK is owned by the over 55 age group. This is also the age group with the most disposable income and the group that require assistance with their exit and succession planning.

The demographic ‘time bomb’ is ticking for buy to let landlords. 

UK BREXIT CONSIDERATIONS:

As stipulated in Brexit speeches by Theresa May, should a scenario arise where the EU wishes to make it difficult for the UK to leave whilst imposing harsh tariffs on trade, Mrs May stated that “We would be free to strike trade deals across the world. And we would have the freedom to set the competitive tax rates and embrace the policies that would attract the world’s best companies and biggest investors to Britain.”

Would the UK therefore become a ‘Tax Haven’?

After all of the demonisation that has occurred over the last two years of the so called ‘Tax Havens’ and ‘Tax Dodgers’, it seems the UK itself may well end up lowering tax rates to attract companies as an incentive to pay less tax!!

Should you have any queries in relation to the above, please do not hesitate to contact your local accountants on 0161 359 4227/0845 054 856

In his summer budget, George Osborne announced that landlords will only be able to offset mortgage interest at the basic rate of tax (20%) by 2020. This will be introduced gradually from 6 April 2017. The restriction will not apply where the property meets all the criteria of a furnished holiday letting.

Current situation
Landlords pay income tax on their rental profit by declaring the amount they earn on a self-assessment tax return. The landlord can deduct mortgage interest (plus associated costs like arrangement fees) along with all other costs before determining the taxable profit. Tax is then charged on the rental profit applying the normal income tax bandings – 20% for basic rate taxpayers, 40% for higher rate taxpayers and 45% for additional rate taxpayers.

New rules
Landlords will no longer be able to deduct all of their finance costs from their property income to arrive at their rental profits. The relief in respect of finance costs will be restricted as follows: 

2017/18 75% allowed 25% basic rate
2018/19 50% allowed 50% basic rate
2019/20 25% allowed 75% basic rate
2020/21 Nil 100% basic rate

 

Example:
Rental income £10,000

  • allowable expenses not including finance cost £2,000
  • finance cost £3,000.

The tax position for a basic rate taxpayer will be as follows:

  Profit before finance cost Finance cost allowed Taxable profit Tax at basic rate Tax relief on finance cost Total tax due
Current 8,000 3,000 5,000 1,000 Nil 1,000
2017/18 8,000 2,250 5,750 1,150 (150) 1,000
2018/19 8,000 1,500 6,500 1,300 (300) 1,000
2019/20 8,000 750 7,250 1,450 (450) 1,000
2010/21 8,000 Nil 8,000 1,600 (600) 1,000

 

While the total amount of tax due has not changed, this does not mean that the landlord’s tax position is unaffected. As taxable profit has increased from £5,000 to £8,000, it is possible that a taxpayer who is currently at the limit of the basic rate band might find himself in a higher rate tax position when nothing else has actually changed.
 
The tax position for a higher rate taxpayer will be as follows:

  Profit before finance cost Finance cost allowed Taxable profit Tax at 40% rate Tax relief on finance cost (20%) Total tax due
Current 8,000 3,000 5,000 2,000 Nil 2,000
2017/18 8,000 2,250 5,750 2,300 (150) 2,150
2018/19 8,000 1,500 6,500 2,600 (300) 2,300
2019/20 8,000 750 7,250 2,900 (450) 2,450
2010/21 8,000 Nil 8,000 3,200 (600) 2,600

 

As expected, a higher rate taxpayer ends up paying more tax as relief for finance costs is restricted to the basic rate.

The company option
As companies continue to benefit from the full relief, it might be possible for landlords to consider transferring properties into limited companies. While corporation tax is due to fall to 19% in 2017 and 18% in 2020, when investing through a company income can only be paid out to the shareholders as a dividend.

From next April, directors can receive £5,000 annually tax-free, with higher rate taxpayers paying a 32.5% dividend tax on any income above this amount. If you’re considering this option, proceed with caution.