How Will Changes In Buy-To-Let Tax Laws Affect Me?
It’s an understatement to say that Buy-to-Let investment is booming in the UK. So many people are cashing in on this property investment strategy, not only because of the high rental yields, but also for the generous tax reliefs that the government gives to landlords.
This fairy tale, unfortunately, may be over soon as new tax rules announced last week signal the cutback on these generous tax reliefs.
George Osborne announced in the latest budget that the government will lessen tax reliefs currently given to all landlords for their Buy-to-Let mortgage interest payments. The changes will be implemented in 4 stages starting from April 2017, he said.
For the benefit of the uninformed, all landlords under the current rules are given the right to claim tax relief for the amount they pay on their mortgage interest payments. This relief is then computed at their personal tax rate.
Suppose Landlord A has a personal tax rate of 45 per cent. For every £100 of mortgage interest Landlord A pays, he can claim a deduction of £45 from that amount. Thus, his total cost for mortgage interest would be reduced to £55 after claiming the tax relief.
Under the changes, however, all landlords will only be given the standard rate of 20 per cent. So Landlord A, when the changes are applied, would have to pay £80 in mortgage interest.
Some industry analysts claim that investors can get around these changes by investing through a limited company.
So how does this all work? The solution is in the problem itself, apparently.
In the same announcement, Mr. Osborne also revealed that tax rates for limited companies would be reduced from 20 per cent to 19per cent in April 2017, and then to 18 per cent in April 2020.
Let’s say Landlord B has a tax rate of 40 per cent. He has a gross rental income of £50,000 annually. He pays £20,000 interest on his mortgages and has other rental expenses worth £10,000. Therefore, his profit before taxes is £20,000.
Come 2020, the year when all the changes are put into effect, Landlord B will be charged £12,000 in taxes leaving him £8,000 take-home profit.
On the other hand, if Landlord B were to invest through a limited company, he will pay just £3,600 tax from his £20,000 profit, thanks to the 18pc corporation tax rate.
But before you jump into the corporate structure, take into consideration some of the setbacks you’ll encounter in this setup:
First, if you want to withdraw your money from the corporation, you’ll have to pay a personal income tax charge imposed at your current personal tax rate.
Second, you’ll have to pay capital gains tax (CGT) on profits you received from the sale of the corporation’s properties.
Third, capital gains tax is also imposed when you close the company and take out the excess capital from your corporation.
Fourth, a 15 per cent stamp duty is charged against the corporation if it buys property above £500,000. The rate for corporations is higher compared to CGT imposed on individuals, but the law allows for many exceptions to this rate.
Fifth, there are few mortgages available for corporations, so expect to get higher buy to let mortgage rates when taking out loans as a corporation.
Lastly, it’s not easy to transfer the ownership of existing properties from personal ownership into corporate assets. The transfer may be considered as disposal or sale for purposes of computing CGT and you may also be charged stamp duty charges as well.
If you think that the benefits outweigh the drawbacks, then by all means go ahead and register as a limited company right away. But if you think there’s too much hassle attached to being a limited company then push through with being a regular investor. It’s your money on the line, so think things through before making any decisions.