Recent tax changes such as Clause 24 Interest Restrictions, 3% extra SDLT and 8% extra Capital Gains Tax have hit landlords hard and these NLA videos explain the full impact
The NLA predict that the changes will mean that 20% of Landlords will sell their portfolios.
Since September lenders to Portfolio Landlords have been required to look at the whole portfolio before lending and this has lead to 70% of landlords with four or more properties saying that they have found it hard to obtain finance.
Overall Residential transactions have seen a slight decline in activity
Since 2015 more and more landlords have been using Limited Companies to purchase property investments even though mortgage interest rates are a around 1% higher there are many advantages:
Clause 24 Interest Rate Restrictions don’t apply to companies
Lenders can take a specific change and a debenture over a company and this is why separate companies for each investment can be an advantage
If you sell the company shares rather than the property the buyer will pay 0.5% SDLT on the shares, the capital gains tax on shares is 8% lower than on residential property and the potentially the company purchaser can takeover the existing debt without needing to refinance
Corporation Tax is 19% where as Landlords pay Income Tax rates, which means companies can help you to build a portfolio quicker as you retain more profit
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?
Incorporation – could you save money by incorporating your residential investments, would you qualify for incorporation tax relief
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
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
Increasing the Rent – Could you charge more to cover the extra taxes?
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
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
