Many higher tax rate paying individual landlords and property investors believe that the Chancellors’ proposed tax changes will not impact their portfolios. They are wrong. Here’s why.
In the Summer Budget 2015, Chancellor George Osborne announced that relief on finance costs (including buy to let mortgage interest) for individuals that receive income on residential property in the UK or elsewhere will be restricted to the basic rate of Income Tax. This will be introduced gradually from 6th April 2017.
What does this mean? Nothing speaks louder than an example of how this might look in practice for an individual higher rate tax paying landlord who owns rental property personally:
2016: Current Situation
Average buy to let property: £300,000
Buy to let mortgage at 75% LTV: £225,000
Annual rental income: £15,000
Annual mortgage interest at 4%: £9,000
Rent of £15,000 less interest of £9,000 gives a taxable Profit of £6,000. Tax at 40% on this is £2,400.
Profit of £6,000 less £2,400 tax gives a Net Profit of £3,600.
2020: After new tax changes fully implemented
In four years’ time all interest offset allowances will be at the basic rate of 20% only.
Taxable profit is now the annual rent of £15,000. 40% tax on this is £6,000 less interest offset at the basic rate (£9,000 x 20% = £1,800).
Tax payable is £6,000 less £1,800. So the tax bill is £4,200.
On this basis, rent of £15,000 minus £9,000 interest and minus tax bill of £4,200 gives a Net Profit £1,800.
2020: After new tax changes fully implemented and mortgage interest rate rises by 2%
In four years’ time assuming mortgage interest rates more are than 2% higher. The annual mortgage interest has increased from £9,000 to £13,500 (at 6%) and the profit before tax is only £1,500.
Taxable profit is now the annual rent of £15,000. 40% tax on this is £6,000 less interest offset at basic rate (£13,500 x 20% = £2,700).
Tax payable is £6,000 less £2,700. So the tax bill is £3,300.
On this basis, tax charge is now greater than the profit so the landlord makes a Net Loss of £1,800.
What should you do?
Most importantly, landlords should seek professional tax advice regarding their individual circumstances to see how the changes will impact them directly.
Some landlords will discover that operating their portfolios via a limited company will be more tax efficient and cost effective in the long term.
In anticipation of these changes coming into effect, in the second half of last year, we saw the number of new purchases by landlords using a limited company increase.
We’ve already helped many landlords to move their properties from personal to limited company ownership. This can be a costly exercise in the short term as properties have to be sold at full market value (they can’t simply be transferred) and we are seeing a surge in activity as landlords look to beat the 3% stamp duty surcharge which comes into effect on 1St April 2016.
If you decide that using a limited company for your portfolio is the way forward, do get in touch now on either of our direct lines, detailed below or by calling the main line 0845 345 6788. We can help you find the right finance for your circumstances. But remember, time is short if you want to avoid the stamp duty surcharge.
We can also review your existing portfolio, free of charge and without obligation, to help you prepare for your meeting with your accountant or tax adviser. Download, complete and return our Property Portfolio Review spreadsheet. Alternatively email us your own spreadsheet if you have one.
You might also be interested in:
Prior to now, when asked by clients whether buy to let properties should be bought in their own names or whether they should use a limited company we have always said “it all depends”. Well the Summer Budget 2015 has altered everything and whilst the answer is still “it all depends”, the balance has shifted markedly in favour of limited companies.
11.11.2015 Setting up an SPV Limited Company
Buy to let lenders which offer mortgages to limited companies usually require the limited company to be an SPV (Special Purpose Vehicle). Jeni explains what one is and how to get one.
26.11.2015 February will be too late
What does the 3% stamp duty surcharge mean for landlords looking to finance buy to let property? Steve Olejnik gives his opinion and shines some light on possible routes forward.
Gary McKenna, consultant mortgage broker at Mortgages for Business explains what options are available to you when looking at transferring your buy to let property from personal to Ltd Co ownership.