I was watching the BBC news this morning and in the Reality Check report they were talking about Debt.
Obviously the biggest amount of debt is mortgages and compared to other countries we are close to the average for Debt.
But its not just an issue for families its an issue for businesses too. We often work with landlords and typically their net cash flow out of the rent received is 2% or less.
That’s the Rental Income less mortgage interest, expenses and tax.
Landlords tend to be asset rich and cash poor, liquidity is vital to cover even minor problems such as repairs and void periods. It is of course easier to have liquidity with a bigger portfolio.
Landlords are facing many problems at the moment not least the Section 24 Interest Restrictions which start this year. This will mean large numbers of landlords with high Loan to Value ratios will have negative cash flow and if the sell they face 18% to 28% capital gains tax (as buy to let get an 8% penalty).
I wonder how many landlords have the resources to handle negative cash flow, how long could they cope what are their contingency plans?
The Lenders and Bank of England have anticipated this problem and for sometime now have tightened the lending rules coverage is now 145% for personal borrowers, but its still 125% for companies as they are aren’t affected by Section 24.
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
Until April 2015 HMRC had been pursuing Landlords who owned multiple properties. HMRC tried to claim up to 6 years Class 2 NI from Landlords saying that owning multiple property investments was a business and therefore Class 2 NI was payable.
HMRC said…
The nature of property letting requires some activity to maintain the investment, but that is not enough to make it a business. For example, being a landlord normally involves:
undertaking or arranging for external and internal repairs
preparing the property between lets
advertising for tenants and arranging tenancy agreements
generally maintaining common areas in multi-occupancy properties; or
collecting rents.
In order for a property owner to be a self-employed earner, their property management activities must extend beyond those generally associated with being a landlord (which include, but are not limited to, the above).
For example, ownership of multiple properties, actively looking to acquire further properties to let, and the letting of property being the property owner’s main occupation could be pointers towards there being a business for NICs purposes.
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.
The Summer Budget 2015 was not great news for Landlords!
The 10% Wear & Tear allowance will end in April 2016 and landlords will only be able to claim for actual expenditure, this could have a ‘cap’ and restrictions, we await the full details. Many landlords will be disappointed at the loss of this useful tax relief.
From April 2017 tax relief on interest will be restricted so that by 2020 it will not be an allowable expense against profit but will attract 20% tax relief.
If you’re a landlord who has undisclosed income you must tell HMRC about any unpaid tax now. You will then have 3 months to calculate and pay what you owe.
The Let Property Campaign is an opportunity open to all residential property landlords with undisclosed taxes. This includes:
those that have multiple properties
landlords with single rentals
specialist landlords with student or workforce rentals
holiday lettings
anyone renting out a room in their main home for more than £4,250 per year, or £2,125 if the property was let jointly, but has not told HMRC about this income
those who live abroad or intend to live abroad for more than 6 months and rent out a property in the UK as you may still be liable to UK taxes
According to the Telegraph….
Fewer than 500,000 taxpayers are registered with HMRC as owning properties other than their home. And yet other sources put the number of Britain’s growing army of landlords at between 1.2million and 1.4million.
Why the discrepancy? No one can say for sure, but the taxman has his answer: not enough people are declaring – and paying tax on – their property incomes and gains.
HMRC will identify those who they believe should have made a disclosure by:
comparing the information already in their possession with customers’ UK tax histories
continuing to use their powers to obtain further detailed information about payments made to and from landlords
Where additional taxes are due HMRC will usually charge higher penalties than those available under the Let Property Campaign. The penalties could be up to 100% of the unpaid liabilities, or up to 200% for offshore related income.
If you owe tax, you must tell HMRC of your intention to make a disclosure. You need to do this as soon as you become aware that you owe tax on your letting income.
At this stage, you only need to tell HMRC that you will be making a disclosure.
You do not need to provide any details of the undisclosed income or the tax you believe you owe.
It sounds like HMRC could be in for bumper Christmas if landlords take advantage of this opportunity to pay up!
House prices are rising as confirmed by the Land Registry in their report 29 April 2013, the annual change is 0.9%, rent is increasing again after a drop in 2009 according to the English Housing Survey, in 2011 it went up 3% to a mean rent after housing benefit of £132 per week. So let’s see who the tenants are (English Housing Survey 2011):
social and private renting households receiving Housing Benefit
Lending rates are low with Bank of England base rate stuck at 0.5%.
So we should see Buy to Let coming back into fashion with investors, with that in mind here are my top tips to minimise your tax:
1. 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
2. If the property is furnished claim for Wear & Tear, you can claim 10% of the rent each year
3. Claim for repair and advertising expenses incurred in getting the property ready for renting
4. Consider how the property is owned for example your partner may pay less tax or if you own it 50/50 you could use their capital gains tax exemption on sale of the property
5. Consider whether owning the property within a limited company might be better, Corporation Tax is 20% for small companies in the UK which can make dividends more tax efficient than personal income.
6. Make sure any borrowings you have are on the Buy to Let so that you can claim tax relief on the interest
