In his seventh Budget Statement, the Chancellor George Osborne announced major plans to restrict tax breaks for residential buy-to-let landlords which could see half of their profits wiped out.
Gradually being phased in over 4 years from April 2017, the proposed change means mortgage interest payments AND fees incurred when taking out buy-to-let mortgages such as arrangement, booking and valuation fees will be restricted to the basic rate of tax, currently 20%.
Under current rules, a 45% taxpayer with an annual rental income of £10,000 and annual mortgage interest of £6,000 would mean a tax bill on the rental profit of £1,800. This tax bill could rise to as much as £3,200 under the new plans.
With buy-to-let properties now accounting for over 15% of new mortgages, it is understood the Chancellor’s aim is to transfer housing stock from property investors to owner-occupiers by removing attractive tax breaks. It is believed further restrictions, particularly around Capital Gains Tax (CGT), may be introduced in the future.
Whilst some landlords may consider raising rent to compensate for the higher tax bill or selling altogether, longer term property investors are looking more closely at the advantages of a limited company.
Analysis by accountancy firm Jeffreys Henry LLP shows higher and additional rate tax paying investors could potentially benefit by holding property with rental income in a limited company.
Not only can limited companies offset the full mortgage interest payments against its tax bill, rental profits are taxed at the corporation tax rate of 20%, as opposed to up to 45% if held personally. Corporation tax rate will fall to 19% in 2017 and 18% by 2020.
From April 2016, under the new dividend rules, landlords, or technically each shareholder of the limited company, can extract up to £5,000 tax free in the form of dividends, however re-investing the profits to buy other properties would be far more tax efficient.
Including children or grandchildren as shareholders could also be an advantageous option. Not only can they also receive up to £5,000 tax free in the form of dividends, there are wider inheritance tax benefits.
Holding investment property in a limited company is not suitable for every landlord and careful planning is required before taking any action.
Transferring existing property into a limited company may incur a Capital Gains Tax (CGT) and Stamp Duty Land Tax (SDLT) liability. There are also fewer mortgage products available to companies.
Some existing landlords may be better off shifting rental income to spouses on lower tax bands before looking at limited companies.
Specialist Property Accountants
Established for over 130 years, Jeffreys Henry LLP is a top-100 accountancy firm with significant property experience.
We act for a range of property portfolios including buy-to-let landlords, property investors, developers, housing associations and related businesses such as chartered surveyors, architects, consulting engineers and estate agents.