Churchill Taxation
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Buy-to-let Woes

April 30th, 2016 by

In the Summer Budget last year the Chancellor announced that the government would be tackling the perceived unfairness that landlords were able to claim interest relief at their highest marginal rate whilst individuals who own their own homes were unable to claim any relief.

This statement seems to forget that landlords are running a business whilst a homeowner isn’t and a basic principle of running a business is that you can claim a tax deduction for costs incurred.

However, the fairness or otherwise of the proposed changes is not the subject of this article – we will assume that the rules will be enacted as currently proposed.   Having said that, it is important to bear in mind that we might see changes along the way and whilst it is important to start planning, no one needs to rush into actually making changes.

There appears to be some confusion around what has been proposed.  The change is to bring in a restriction for interest relief, not to abolish it completely.  Therefore there will still be some relief available but it will be restricted to basic rate (20%) under the proposed changes.

The second point to note is that as proposed, the restriction only applies to residential property investors.   It doesn’t apply to commercial investors or owners of furnished holiday lets.

Furthermore, much has been made of the fact that companies are not affected by the proposed rules.  On the back of this there is a flurry of activity to consider incorporating property portfolios.

However, it is important to remember that companies currently pay tax at 20% so they are already restricted to 20% relief by the nature of the tax calculation.  For this reason there is no point in trying to apply such a restriction to companies.

Incorporation may be the answer for some taxpayers, but certainly not everyone.  Each case needs to be considered on its own merits.  There are many considerations including:

  • Do you need to extract all of the profits from the company, for example if you use the profits to live on? If this is the case, there will be an additional tax charge when you extract the funds from the company.  This needs to be factored into the overall tax cost.
  • Will the bank allow mortgages to be transferred to a company? Will they renegotiate the interest rate you are paying?
  • What level of tax will you pay on the way into the company – particularly capital gains tax and stamp duty land tax?
  • What running costs will you incur going forward and will that negate some of the savings from incorporation?

The limit on the relief starts from 6 April 2017 and will be phased in over 4 years – the full restriction is intended to be in place (20% relief only) by 2020/21.

So what can landlords do in anticipation of the changes?

Some landlords are considering selling some or all of their property portfolios in order to repay some or all of the debt.

Others are considering incorporation, but be aware that this route is not appropriate for everyone and advice should be sought for the reasons set out above.

Lastly, some landlords will sit tight and pay the extra tax.

Whatever the eventual chosen route, the key message for all landlords is to ensure that they are taking advice sooner rather than later and certainly ahead of the changes.

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