How will Investors Avoid the Tax Buy-to-Let Changes?

The profits of many landlords are likely to change for the worst following a recent announcement that will put a limit on the tax relief that can be claimed on mortgage costs.

The Chancellor, George Osborne, has restricted relief on mortgage interest payments to 20%. This will be brought in over a four year period beginning in April 2017.

Those landlords who earn over a certain threshold will be affected as they are currently able to claim relief at their personal tax rate which means their interest payments will increase considerably.  However, there are ways around the issue by investing through a limited company.

Analysis has shown that this is more efficient from a tax perspective for those who pay high rates of tax and there is no requirement to own a large portfolio in order to benefit. One portfolio is enough which means that the profits can be re-invested at a lower rate should investors wish to add to it at a later date. However, for those who already have an investment property could experience costs that make transferring it a pointless task.

One of the main benefits form a tax perspective of holding properties within a company is that rental profits are taxed at the corporation tax rate of 20%.  The latest announcement means that the government will drop the rate to 19% in April 2017 and then 18% in April 2020.

It is possible for landlords to take profits from the company as dividends as well as the rise in the dividends but this will not outweigh the savings.

From April 2016, the first £5,000 on annual dividend income will not be susceptible to tax but anything above this amount will mean that basic-rate tax-payers will pay 7.5%, those who pay a higher rate of tax will pay 32.5% and those who are additional-rate taxpayers will pay 38.1%.

For those landlords who want to increase their portfolio, it makes sense to hold the properties in a company whilst not distributing the dividends but ensuring that they reinvest any profits.

Other factors should be considered because there will be a personal income tax charge on any money removed from the company at the personal tax rate.

landlord investment tax
Image credit: Wikipedia

When the time comes to sell the properties, corporation tax would be paid on any profits and if the company is closed, it is possible to take out excess money but capital gains tax will have to be paid on it.

If a property is purchased for more than £500,000 and it is held in a company, there is a 15% stamp duty charge which is considerably higher than the rate paid by personal investors but there are a wider range of exemptions available.

Companies will not have access to the same number of mortgage products as individuals which means rates could be higher. It can also be difficult to transfer properties that are already owned into a company and they can be seen as a disposal for capital gains tax which means tax could be due along with a possible stamp duty charge.

This article was provided by Hopwood House, property investment specialists who provide international investment opportunities to investors both at home and overseas.

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