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.
There are many reasons why using a company to invest in residential property is good idea and Summer Budget 2015 made companies an even more attractive option.
1. Restriction of Mortgage Interest Tax Relief
Currently this is just a ‘Policy Paper’ but the 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.
Most investors will have multiple properties and high levels of borrowing.
Furnished Holiday Lets are excluded from the restriction – Official Policy
2. Corporation Tax Rates
The current rate of Corporation Tax is 20% but its falling year on year and by 2020 it will be 18%.
Not only that, its the same rate no matter how many companies you have, previously when there were multiple Corporation Rate if you had associated companies the small companies rate was reduce in a marginal rate calculation.
Individual tax rates are
Basic rate
20%
Up to £31,785
Higher rate
40%
£31,786 to £150,000
Additional rate
45%
Over £150,001
3. Capital Gains Tax
Capital Gains Tax is at 20% in companies (falling to 18% by 2020) and companies are allowed to apply HMRC Indexation Allowance to offset the effect of inflation.
Individuals get an annual allowance of £11,100 and basic rate tax payers pay 18% with higher rate tax payers paying a massive 28% with no indexation.
There are special rules for UK Companies owned by Non UK Residents.
There is no rollover relief for companies or individuals investing in Residential Property because investment isn’t a trading activity.
4. Stamp Duty
Stamp Duty (SDLT) on selling Shares is 0.5%.
Example – So £1,995 × 0.5% = £9.97. This is rounded up to the nearest £5, which means you pay £10 Stamp Duty.
Stamp Duty on Property Sales is calculated as follows
• No stamp duty will be paid on the first £125,000 of a property
• 2% will be paid on the portion up to £250,000
• 5% is paid for the portion up to £925,000
• 10% is paid on the portion up to £1.5m
• 12% is paid on anything above that
SDLT is charged at 15% on residential properties costing more than £500,000 bought by certain corporate bodies (or ‘non-natural persons’). These include:
companies
partnerships including companies
collective investment schemes
The 15% rate doesn’t apply to property bought by trustees of a settlement or bought by a company to be used for:
a property rental business
property developers and trader
property made available to the public
financial institutions acquiring property in the course of lending
property occupied by employees
farmhouses
The standard residential rate of SDLT applies in these cases. These exclusions are subject to specific conditions.
If 6 or more properties form part of a single transaction the rules, rates and thresholds for non-residential properties apply.
5. Inheritance Tax (IHT) and Potentially Exempt Transfers planning
One of the big benefits of Shares is that its easy to split ownership.
Potentially Exempt Transfers (PET’s) allow you to give away shares provided you survive more that 7 years after the transfer, shares make PETs easy and simple.
When you give away shares it will potentially trigger a capital gain but you will be able to use your personal capital gains allowance of £11,100 to offset this gain.
