How investors will beat the latest buy-to-let crackdown
There is a way around the restrictions on mortgage tax relief announced in this week’s Budget.
Hundreds of thousands of landlords are likely to see their profits fall thanks to changes announced in this week’s Budget which will limit the amount of tax relief they can claim on mortgage costs.
The Chancellor, George Osborne, revealed that the Government will restrict the relief on mortgage interest payments for all landlords to the basic rate of income tax, which is 20pc. The restriction will be phased in over four years, starting from April 2017. This is a huge blow for wealthier landlords with larger incomes, as they can currently claim relief at their personal tax rate.
For a 45pc taxpayer, every £100 of mortgage interest they pay costs just £55 after claiming tax relief, but this will rise to £80 when the changes are fully implemented from April 2020.
But tax experts have insisted that there’s a way around the problem – by investing through a limited company.
Analysis by accountancy firm Blick Rothenberg showed this would be a more tax-efficient approach for higher and additional-rate taxpayers.
And you don’t have to own a vast portfolio of properties to benefit from a corporate structure. Just one is enough and you’ll be able to reinvest the profits at a lower tax rate if you do want to add to your portfolio later on. If you already own an investment property, however, transferring it to a company could cost more than it’s worth.
So how does it work?
The main tax benefit of holding properties within a company is that rental profits are taxed at the corporation tax rate of just 20pc. The Government announced this week that the rate would fall to 19pc in April 2017, and then to 18pc in April 2020. Landlords can take profits from the company as dividends and even the rise in the dividend tax (see page 5), also announced this week, will not outweigh the savings. From April next year only the first £5,000 of annual dividend income will be exempt from tax. Above this amount, basic-rate taxpayers will pay 7.5pc, higher-rate taxpayers will pay 32.5pc, additional-rate taxpayers will pay 38.1pc.
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So let’s take the example of a higher-rate taxpayer (40pc) who receives £50,000 a year in gross rental income. He pays £20,000 interest on his mortgages and has other rental expenses worth £10,000. His total rental profit before tax is £20,000. If he owned the properties personally in 2020 when the full changes come into force he would owe £12,000 in tax on his rental profit, giving him £8,000 take-home profit.
If he held the properties in a company he would pay just £3,600 tax on the rental profit, thanks to the 18pc corporation tax rate. This leaves the company with post-tax profit of £16,400. If this was paid to the landlord as a dividend the additional tax due would be £3,705, giving a total tax charge of £7,305. The landlord’s take-home profit would be £12,695 – £4,695 more. For landlords who want to grow their portfolio it would be even more tax-efficient to hold the properties in a company, not distribute dividends and reinvest the profits.
There are other factors to take into consideration however. There would be a personal income tax charge if you wanted to take money out of the company, at your personal tax rate. When you wanted to sell the properties corporation tax would be due on the profits. And when you closed the company you could take out any excess money as a capital payment but capital gains tax (CGT) would be due. This would apply on selling the property even if you hadn’t used a company structure.
Note that if you buy a property worth more than £500,000 in a company there is a 15pc stamp duty charge – much higher than the rates for personal investors – however broad exemptions are available.
There are also fewer mortgage products available to companies than individuals, so rates may be worse. If you already own properties it is not easy to transfer them into a company. This can be considered a disposal for CGT purposes, so you could face a tax bill. There would also be a potential stamp duty charge.
Michael Gilden and his girlfriend Natalie plan to build a buy-to-let portfolio. Mr Gilden described the changes to mortgage interest relief as a “game changer”. “We have been left wondering how best to proceed,” he said. “I had considered purchasing properties through a limited company, but decided against it because it can be more difficult to secure finance. I’ll have to rethink that now.”
Date: 11/07/2015 | Source: The Telegraph
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