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As any landlord will tell you the recent tax changes that have been imposed on the private landlord have significantly increased the tax burden in many cases. The main changes are as follows:


The 3% additional stamp duty on a second property or Buy to Lets

For residential properties HMRC has begun to restrict the claim for mortgage interest relief to the basic rate of tax when the rental income is taxed at the individual’s highest tax rate, which could be up to 45%.

This change is being phased in gradually but will be fully implemented by the 6th April 2020 at which time the full effect of the changes will be felt.

The 10% Flat Rate Wear and Tear Allowance was abolished in 2016 also.

These changes and the increasing tax burdens have made planning for rental properties more important and the following considerations need to be made prior to embarking on your journey as a landlord if possible:

  • Ownership – would it benefit to have the property in the sole name of a spouse?
  • Trading Style – would it benefit to own the properties inside a limited company?
  • Do I need the rental income to support day to day living costs?
  • Do I need finance to purchase the property?
  • Who is the long term beneficiary of the property going to be? (you or your children?)

Current Trends

There has been a movement towards the use of limited companies in the last few years as a consequence of the tax treatment of individuals, and also the fact that banks have now become more receptive to lending money to special purpose vehicles (limited companies).

Who should look to incorporate their property portfolios?

The incorporation route is not for all landlords as the tax restriction on mortgage interest only affects higher rate tax payers, therefore if your combined income is less than £50,000 for the 2019/20 tax year there is no real change.

(Remember though it’s total income including rental income without the deduction of rents that counts).

There are various advantages and disadvantages of incorporation:

Advantages

  • Lower rates of tax
  • Tax treatment of mortgage interest
  • The transfer of shares in a limited company to a family member is easier , which in certain circumstances can reduce both Capital Gains Tax and even Inheritance Tax.
  • Limited Liability
    Owning the property within a limited company could restrict any claim against you personally in the event of a tenant having an accident which is proven to be the fault of the landlord.

Disadvantages

  • Capital Gains Tax and Stamp Duty
    If you already have a property portfolio the transferring of property to a limited company requires planning to ensure that Capital Gains Tax and Stamp duty are minimised.
  • Mortgage availability and fees
    Whilst banks are becoming more willing to loan money to companies, they often charge higher fees and interest rates in comparison to personal Buy to Let mortgages.
  • Personal Tax on the withdrawal of money from the company
    If the excess profits are to be left in the company to invest in further properties then there is no issue, however if you require a large amount to be withdrawn for an unplanned expense the tax rate on such a dividend could rise to 38.1%.

Red Tape and Compliance

Being a limited company brings with it more compliance work and slightly higher fees for accountancy and taxation services.

Loss of some tax reliefs

If an individual sells a rental property then they receive an Annual Capital Gains Tax Allowance, which from 6th April 2019 is £12,000. Companies do not receive this allowance.

If an individual landlord decides to move into one of his rental properties, then this property will become his principal private residence and has certain tax advantages.

As can be seen the decision on whether to purchase rental properties within a company is not straight forward and we would suggest that you seek professional advice prior to making the purchase.

At Murray and Lamb, we offer a free initial consultation so why not take advantage.

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