Following the Chancellor’s Summer Budget announcement, we have summarised the tax changes that Buy to Let investors should be aware of….
CHANGES FROM 6 APRIL 2016
Relief for furniture and fittings
At present, a wear and tear allowance is given at 10% of the net rents received in respect of fully furnished let properties. This will be abolished from 6 April 2016 and, in its place, all landlords of residential property (whether fully furnished or not) will be able to claim only the actual cost of replacing furnishings. The deferral of capital expenditure until after 6 April 2016 to optimise tax relief should therefore be considered.
CHANGES FROM 6 APRIL 2017
Relief for mortgage/loan interest for BTL investors
Individual landlords currently receive tax relief at their highest rate of income tax on all the interest they pay to finance their letting business. From April 2017, the amount of interest eligible for tax relief at the higher and additional rates (40% and 45%) will be restricted to the following:
- 5% of the interest paid in 2017/18
- 50% of the interest paid in 2018/19
- 25% of the interest paid in 2019/20
The balance of the interest is not deductible in calculating the profit, but it does give a tax reduction equal to 20% of the interest, whether you are a basic rate or a higher rate taxpayer. Having modelled the effect of the new rules, some landlords will find that their annual tax bill will now exceed the cash rental profit being earned, if no action is taken.
These rules will not apply to the rental of commercial property or to properties that qualify as furnished holiday lettings. The rules will apply to the letting of residential properties by a partnership or LLP. Where a person has a loan which is used partly for residential property and partly not, the interest on the loan will have to be apportioned between the two elements.
BTL investors should start planning now
Individual property investors should start immediate planning to ensure the correct structure for their property rental business is in place.
It is increasingly popular for landlords to incorporate their property business and this should remain the case. The Limited Company will not be affected by the proposed restrictions to mortgage interest relief and it also provides several other opportunities from a tax perspective, including:
- The low rates of corporate tax, especially with the forthcoming reductions in the rate of corporation tax from 20% to 18% in coming years, means higher post-tax profits can be retained for reinvestment or be used to repay borrowing. When the corporate rate is 18% for every £100 of profit earned by a company, there will be £82 left after tax to reinvest, compared to £55 for an individual who pays income tax at the 45% rate.
- Despite the increases to dividend taxation to come into effect from 6 April 2016, there is still the opportunity for tax efficient remuneration from the company.
Should I incorporate my property business?
A reduction in the tax payable on the rental income by holding properties in a company is important, but this has to be balanced against the comparative treatment of capital gains as between a company and an individual.
If you are contemplating the transfer of properties, there would also be a need to manage potential liabilities to Stamp Duty Land Tax and/or Capital Gains Tax on those transfers.
Finally, if the properties are subject to a mortgage there will need to be negotiations with the lender about the proposed transfer of the properties to a company.
In summary, the incorporation of a property rental business is a matter which requires detailed consideration of the tax and practical issues of such a proposal. We have experience of guiding clients through these issues.
We strongly advise that you take advice based on your individual circumstances.
If you would like further advice about the changes outlined in the Summer Budget, or for planning the right structure for your property rental business, please contact Alastair Wilson on 0191 285 0321 or firstname.lastname@example.org