Why are property investors rushing to form limited companies? Reply

Hand writing the text: Property News

During October to December 2016, 69% of all new Buy to Let purchase applications were made by Limited Companies according to Mortgages for Business.

The percentage of remortgage applications in company names also increase to 31% in Q4 up from 23% in Q3 last year.

The total number of lenders offering Buy to Let finance to limited companies remained stable at 14 and the total number of products available rose slightly from 195 in Q3 to 198 in Q4.

This is despite the fact that lenders are still charging higher rates of interest for companies, often 1% extra.

I think lenders will very soon be forced to bring rates into line as competition amongst lenders increases.

The main driver has been the Restriction of Mortgage Interest Tax Relief

2017/18 75% of the interest can be claimed in full and 25% will get relief at 20%

2018/19 50% of the interest can be claimed in full and 50% will get relief at 20%

2019/20 25% of the interest can be claimed in full and 75% will get relief at 20%

2020/21 100% will get only 20% relief

For a 20% tax payer that’s fine but for higher rate taxpayers its a disaster that will lead to them paying a lot more tax

These rules will not apply to Companies, Companies will continue to claim full relief.

Companies have many other advantages too:

  • Stamp Duty on Shares is 0.5% so if you own each property in a separate company you can sell the shares rather than selling the company
  • Holding properties in separate companies makes it easier for lender to take a charge over the business assets
  • Companies are better for Inheritance Tax Planning enabling the company shares to be given away in stages
  • Corporation tax is 20% and falling which means if you want to grow you portfolio you will retain more of the profit for re-investment

Companies have to be the way forward for investors.

Ask your accountant!

steve@bicknells.net

 

Soon you could pay income tax on selling a Buy to Let! Reply

act now icon

If you thought paying Capital Gains at higher rates was bad enough wait till you have to pay income tax rates on the gains!

As reported by Property 118 on 25th August 2016

The government have slipped some additional clauses into the finance bill 2016 “Sections 75-78: taxation of profits from trading and investing in UK Land” which make profits made on the sale of buy-to-let property become taxable income, at income tax rates.

They have started a campaign to try to stop the change https://www.property118.com/capital-gains-on-btl-to-be-taxed-as-income/89928/

Its another rule that won’t apply to companies.

https://stevejbicknell.com/2015/08/24/5-reasons-why-you-need-a-property-investment-company/

Factsheet

Click Here to Download the Factsheet

 

steve@bicknells.net

How can I use my property letting losses? Reply

Boot

Landlords need to register for Self Assessment .

They will need to keep track of the rental income and claim allowable expenses

  • Mortgage or Loan Interest (but not capital)
  • Repairs and maintenance (but not improvements)
  • Decorating
  • Gardening
  • Cleaning
  • Travel costs to and from your properties for lettings or meetings
  • Advertising costs
  • Agents fees
  • Buildings and contents insurance
  • Ground Rent
  • Accountants Fees
  • Rent insurance (if you claim the income will need to be declared)
  • Legal fees relating to eviction

Rent less expenses will either produce a profit or a loss.

Making a loss

If you have residential buy to let properties that you own personally you can deduct any losses from your property letting profit and enter the figure on your Self Assessment form.

You can offset your loss against:

  • future profits by carrying it forward to a later year
  • profits from other properties (if you have them)

You can only offset losses against future profits in the same business.

Incorporation

If you incorporate your Buy to Let business, see our blog in incorporation tax relief..

https://stevejbicknell.com/2016/01/04/can-a-residential-property-investor-use-incorporation-tax-relief/

If you transfer your business in exchange for shares to another company, you can use any unused losses against your income from the new company.

https://stevejbicknell.com/2015/05/20/can-you-save-tax-by-transferring-your-self-employed-losses-to-a-company/

steve@bicknells.net

 

 

 

If you’re a Landlord get an accountant now! Reply

Hand writing the text: Property News

Last week the Bank of England turned up the heat on Landlords.

The Bank of England expressed concerns about Buy-to-Let Investment and lending levels. New rules have been proposed that aim to tighten requirements for landlords involved in investment properties and limit the amount that can be borrowed for these types of endeavours.

This reaction comes from recent suggestions that mass buy-to-let property management could have a destabilising effect on the UK economy.

The rules put a spotlight on lenders, encouraging them to require more extensive financial information from the potential landlord before granting a mortgage.

The requirements go beyond ensuring the rental income of the property is significantly higher than the mortgage payments (the income coverage ratio), to also considering an individual’s overall financial situation.

The Prudential Regulation Authority (PRA) – an arm of the Bank – has recommended that banks and building societies take account of:

  • all the costs a landlord might have to pay when renting out a property
  • any tax liability associated with the property
  • a landlord’s personal tax liabilities, “essential expenditure” and living costs.
  • a landlord’s additional income – where this is being used to support the borrowing. This income should be “verified”.

If adopted, the new rules could reduce lending to landlords by up to 20% over the next three years.

https://debitoor.com/blog/how-use-debitoor-property-accounting

Landlords have already been hit but tax changes…

Buy to Let Stamp Duty

Prop Value Std Rate B2L Rate
< £125,000 0% 3%
£125k to £250k 2% 5%
£250k to £925k 5% 8%
£925k to £1.5m 10% 13%
Over £1.5m 12% 15%

A 3% surcharge on stamp duty when some buy-to-let properties and second homes are bought will be levied from April 2016.

This means it will add £5,520 of tax to be paid when buying the average £184,000 buy-to-let property. The new charge would have hit 160,000 buyers if it had applied last year.

But, commercial property investors, with more than 15 properties, will be exempt from the new charges.

Stamp Duty on Selling Shares is 0.5% so why aren’t more investors buying property into companies and then selling the shares in the company!

Mortgage Interest

Mortgage Interest offset against property income will be restricted

2017/18

75% of the interest can be claimed in full and 25% will get relief at 20%

2018/19

50% of the interest can be claimed in full and 50% will get relief at 20%

2019/20

25% of the interest can be claimed in full and 75% will get relief at 20%

2020/21

100% will get only 20% relief

For a 20% tax payer that’s fine but for higher rate taxpayer it’s a disaster that will lead to them paying a lot more tax

These rules will not apply to Companies, Companies will continue to claim full relief.

Capital Gains

From April 2016, the higher rate of Capital Gains Tax will be cut from 28% to 20% and the basic rate from 18% to 10%.

There will be an additional 8% surcharge to be paid on residential property.

Capital Gains Tax on residential property does not apply to your main home, only to additional properties (for example a flat that you let out).

Wear & Tear

Landlords have been used to claiming 10% of rental income as a tax deductible wear and tear allowance, but that will change in April 2016.

The Wear and Tear Allowance for fully furnished properties will be replaced with a relief that enables all landlords of residential dwelling houses to deduct the costs they actually incur on replacing furnishings, appliances and kitchenware in the property.

The relief given will be for the cost of a like-for-like, or nearest modern equivalent, replacement asset, plus any costs incurred in disposing of, or less any proceeds received for, the asset being replaced.

What could a Property Investor do to reduce the impact of these changes?

  1. Incorporation – could you save money by incorporating your residential investments, would you qualify for incorporation tax relief
  2. Pension Contributions – Pension Contributions currently receive tax relief at your rate of tax – 20% to 45% – so if you are a 40% tax payer you would need pay half the value of your 20% restricted interest into your pension to mitigate the extra tax
  3. Change of Use – would your Buy to Let be able to be converted to a Furnished Holiday Let? or another type of commercial property on which the interest restriction won’t apply
  4. Increasing the Rent – Could you charge more to cover the extra taxes?
  5. Spouse Income Tax Elections – If the property is jointly held HMRC assume a 50/50 split of the income but you can change that using Form 17 this might be useful if one of you is a basic rate taxpayer and the other a higher rate taxpayer
  6. Tax Deductible Expenses – Many landlords overlook expenses at the moment but they could become a lot more important, for example, use of your home, motor expenses, computers, travel and subsistence, phone costs etc

steve@bicknells.net

What are the tax changes for Residential Investors? 1

 

Boot

But to Let Stamp Duty

Prop Value Std Rate B2L Rate
< £125,000 0% 3%
£125k to £250k 2% 5%
£250k to £925k 5% 8%
£925k to £1.5m 10% 13%
Over £1.5m 12% 15%

A 3% surcharge on stamp duty when some buy-to-let properties and second homes are bought will be levied from April 2016.

This means it will add £5,520 of tax to be paid when buying the average £184,000 buy-to-let property. The new charge would have hit 160,000 buyers if it had applied last year.

But, commercial property investors, with more than 15 properties, will be exempt from the new charges.

Stamp Duty on Selling Shares is 0.5% so why aren’t more investors buying property into companies and then selling the shares in the company!

Mortgage Interest

Mortgage Interest offset against property income will be restricted

2017/18

75% of the interest can be claimed in full and 25% will get relief at 20%

2018/19

50% of the interest can be claimed in full and 50% will get relief at 20%

2019/20

25% of the interest can be claimed in full and 75% will get relief at 20%

2020/21

100% will get only 20% relief

For a 20% tax payer that’s fine but for higher rate taxpayer it’s a disaster that will lead to them paying a lot more tax

These rules will not apply to Companies, Companies will continue to claim full relief.

Capital Gains

From April 2016, the higher rate of Capital Gains Tax will be cut from 28% to 20% and the basic rate from 18% to 10%.

There will be an additional 8% surcharge to be paid on residential property.

Capital Gains Tax on residential property does not apply to your main home, only to additional properties (for example a flat that you let out).

Wear & Tear

Landlords have been used to claiming 10% of rental income as a tax deductible wear and tear allowance, but that will change in April 2016.

The Wear and Tear Allowance for fully furnished properties will be replaced with a relief that enables all landlords of residential dwelling houses to deduct the costs they actually incur on replacing furnishings, appliances and kitchenware in the property.

The relief given will be for the cost of a like-for-like, or nearest modern equivalent, replacement asset, plus any costs incurred in disposing of, or less any proceeds received for, the asset being replaced.

What could a Property Investor do to reduce the impact of these changes?

  1. Incorporation – could you save money by incorporating your residential investments, would you qualify for incorporation tax relief
  2. Pension Contributions – Pension Contributions currently receive tax relief at your rate of tax – 20% to 45% – so if you are a 40% tax payer you would need pay half the value of your 20% restricted interest into your pension to mitigate the extra tax
  3. Change of Use – would your Buy to Let be able to be converted to a Furnished Holiday Let? or another type of commercial property on which the interest restriction won’t apply
  4. Increasing the Rent – Could you charge more to cover the extra taxes?
  5. Spouse Income Tax Elections – If the property is jointly held HMRC assume a 50/50 split of the income but you can change that using Form 17 this might be useful if one of you is a basic rate taxpayer and the other a higher rate taxpayer
  6. Tax Deductible Expenses – Many landlords overlook expenses at the moment but they could become a lot more important, for example, use of your home, motor expenses, computers, travel and subsistence, phone costs etc

steve@bicknells.net

 

 

 

Buy to Let interest relief tax saving ideas 3

To Let

Restriction of Mortgage Interest Tax Relief

The governments’ plan is to restrict individuals on claiming mortgage interest as a cost against their property investment income, for individuals it will work as follows

2017/18 75% of the interest can be claimed in full and 25% will get relief at 20%

2018/19 50% of the interest can be claimed in full and 50% will get relief at 20%

2019/20 25% of the interest can be claimed in full and 75% will get relief at 20%

2020/21 100% will get only 20% relief

For a 20% tax payer that’s fine but for higher rate taxpayer its a disaster that will lead to them paying a lot more tax

These rules will not apply to Companies, Companies will continue to claim full relief.

What could a Property Investor do to reduce the impact of these changes?

Here are a few ideas….

  1. Pension Contributions – Pension Contributions currently receive tax relief at your rate of tax – 20% to 45% – so if you are a 40% tax payer you would need pay half the value of your 20% restricted interest into your pension to mitigate the extra tax
  2. Change of Use – would your Buy to Let be able to be converted to a Furnished Holiday Let? or anther type of commercial property on which the restriction won’t apply
  3. Increasing the Rent – Could you charge more to cover the extra tax?
  4. Spouse Income Tax Elections – If the property is jointly held HMRC assume a 50/50 split of the income but you can change that using Form 17 this might be useful if one of you is a basic rate taxpayer and the other a higher rate taxpayer
  5. Tax Deductible Expenses – Many landlords overlook expenses at the moment but they could become a lot more important, for example, use of your home, motor expenses, computers, travel and subsistence, phone costs etc

What do you plan to do when the changes take effect?

steve@bicknells.net

Contact Us

Can you assign your property rents to a company? 1

To Let

This is a hot topic at the moment, here is the scenario…

You own a Buy to Let property personally but want to assign the rent to a specifically created company which you own. You are a higher rate tax payer where as Corporation Tax is 20%.

You want to retain ownership personally. You can’t transfer the property to company because Capital Gains Tax and Stamp Duty would apply. Incorporation Tax Relief isn’t available.

Can the Rents be assigned?

Rents

There isn’t a tax rule that says you must lease a property at Market Rent, so in theory, you could create a lease to your company for a period to match the letting period the company will give to its tenant and charge the company a nominal rent.

There are some issues with this for example PIM2220

Unless the landlord charges a full market rent for a property (and imposes normal market lease conditions) it is unlikely that the expenses of the property are incurred wholly and exclusively for business purposes ( PIM2010).

Another potential problem is the mortgage which will be in the Landlords name, not the Company name, so the rent would have to cover the mortgage payments, which means it won’t help with the new interest restrictions coming in soon.

SDLT

This will be a connected party lease and subject to SDLT at market value but as the period will be short its unlikely that SDLT will be payable.

However (SDLTM17035), the renewal of a lease will not be treated as linked with the original lease at all for stamp duty land tax (SDLT) purposes if it can be shown (with appropriate evidence) to have been negotiated at arm’s length, for example if the original or earlier lease:

  • expired naturally
  • contained no right or compulsion of either party to renew and/ or
  • was renewed following entirely new negotiations, as would apply to a new tenant.

Otherwise, where leases of the same premises are granted:

  • between the same or connected parties
  • to take effect one immediately after the other
  • whether at the same time or not

these are successive linked leases for SDLT purposes, with tax calculated under the provisions of FA03/SCH17A/PARA5. Refer to SDLTM17040 for details.

Other Problem Areas

  • The company will be a closed company so if it carried out improvements to the property these could be taxable benefits to shareholders
  • Once the company has the rents and the profits how will you extract them tax efficiently

steve@bicknells.net

Contact Us

Can a Residential Property Investor use Incorporation Tax Relief? 2

for rent black blue glossy web icon

There are many reasons why residential property investors are now rushing to incorporate, the biggest reason being the Restriction of Mortgage Interest Tax Relief.

Clause 24 of the Finance Bill sets out plans is to restrict individuals on claiming mortgage interest as a cost against their property investment income, for individuals it will work as follows

2017/18 75% of the interest can be claimed in full and 25% will get relief at 20%

2018/19 50% of the interest can be claimed in full and 50% will get relief at 20%

2019/20 25% of the interest can be claimed in full and 75% will get relief at 20%

2020/21 100% will get only 20% relief

For a 20% tax payer that’s fine but for higher rate taxpayer its a disaster that will lead to them paying a lot more tax

These rules will not apply to Companies, Companies will continue to claim full relief.

When you sell or give a residential property to your Company you will incur Capital Gains Tax if you make a gain, its for this reason many investors and their advisers believe that they are ‘automatically’ entitled to claim Incorporation Tax Relief, but in many cases Incorporation Tax Relief will NOT be available!

In summary Incorporation Tax Relief allows Sole Traders to postpone/hold over a gain by transferring all their business assets into a limited company in return for Shares.

The key problem area is the Property Investment is generally not considered to be a Trade.

Some of the issues were resolved in EM Ramsay v HMRC [2013] UKUT 0226 (TCC)

Mrs Ramsey carried out the following activities

  1. Mr & Mrs Ramsey personally met potential tenants
  2. Mrs Ramsey check the quarterly electric bills
  3. Mrs Ramsey arranged insurance
  4. Mrs Ramsey arranged and attended to maintenance issues (drains)
  5. Mrs Ramsey and her son maintained the garages and cleared rubbish
  6. Mrs Ramsey dealt with post
  7. Mrs Ramsey dealt with fire regulation issues
  8. Mrs Ramsey arranged for a fence to be erected
  9. Mrs Ramsey created a flower bed
  10. Shrubs were pruned and leaves swept
  11. The parking area was cleared of weeds
  12. The flag stones were bleached
  13. Communal areas were vacuumed
  14. Security checks were carried out
  15. She took rubbish to tip
  16. She cleaned vacant flats
  17. she helped elderly tenants with utilities

This work equated to at least 20 hours per week and Mrs Ramsey had no other employment.

It is because she did the work herself that her property investment was considered a ‘Business’ and eligible for Incorporation Tax Relief. In summing up the Judge said…

Ramsay

 

If Mrs Ramsay had employed a Property Management Company or Letting Agent to do the work she would NOT have been able to claim ‘Incorporation Tax Relief’.

Most Buy to Let Landlords with one or two properties are Passive Investors who delegate all the responsibilities to professional letting agents, they will not be doing enough to comprise a business!

Steve@bicknells.net

Contact Us

 

Extra 3% Stamp Duty on Buy to Lets – but what if you have a property company? Reply

To Let

A 3% surcharge on stamp duty when some buy-to-let properties and second homes are bought will be levied from April 2016.

This means it will add £5,520 of tax to be paid when buying the average £184,000 buy-to-let property. The new charge would have hit 160,000 buyers if it had applied last year.

George Osborne said the new surcharge would raise £1bn extra for the Treasury by 2021.

https://i0.wp.com/media.property118.com/wp-content/uploads/2015/11/SYQKJE07TB.jpg

But, commercial property investors, with more than 15 properties, are expected to be exempt from the new charges.

Stamp Duty on Selling Shares is 0.5% so why aren’t more investors buying property into companies and then selling the shares in the company!

See my blogs, click to read

5 reasons why you need a Property Investment Company!

10 ways to pay less Property Tax (Investors)

steve@bicknells.net

Contact Us

 

Is a Company the best way forward for Buy to Lets? Reply

Mosaïque de logements

The Summer Budget made this decision even more complicated!

First landlords have a lot to consider..

  1. Transferring their portfolio will probably incur Stamp Duty and Capital Gains
  2. Mortgages can be harder to find and more expensive for companies
  3. Share ownership options and objectives
  4. Company Admin, Accounts and Tax
  5. Capital Gains Allowances, ATED and IHT

But one key advantage is explained by Adrian Benosiglio, real estate tax partner at Baker Tilly (www.yourmoney.com)

For example, Mr Jones (a 45% taxpayer) has a house with net rental income of £100,000 and mortgage interest of £90,000. Currently he would pay £4,500 income tax on profits of £10,000.

From April 2020, he’ll pay £27,000* income tax. This is calculated by applying his marginal rate of tax to his rental income (£100,000 x 45%) which gives a tax liability of £45,000 and offsetting this with tax relief claimed on the mortgage interest at the lower amount of 20% (90,000 x 20%) which would give tax relief of £18,000. This would leave Mr Jones with a tax bill of £27,000 (£45,000 less £18,000). The end result would be an overall annual loss after tax of £17,000, with insufficient cash flow to make repayments on his loan.

A company is not affected by these measures and therefore would receive full mortgage interest relief. Additionally, corporation tax is charged at 20% and is due to fall to 18% in 2020. Using the above example, a company would pay £2,000 currently and £1,800 from 2020; leaving sufficient funds to make repayments.

Complicated isn’t it!

steve@bicknells.net