The whole tax regime in relation to resi properties is in a state of flux; all the more reason why landlords should be wary of rushing into things, says Scott Leonard…
These are challenging times indeed for buy-to-let landlords. There have been a number of announcements from the Chancellor during 2015 which are likely to hit buy to let landlords hard.
First came the announcement in the Budget that mortgage interest relief is to be limited for those renting out residential properties. Relief will be limited to basic rate tax, which means that those paying income tax at 40% or 45% will pay more income tax on the rental income received.
This change is to be implemented in such a way that some landlords, who are currently below the higher rate tax threshold, could be pushed into the higher rate tax bracket, without any change in their income. These changes are being phased in over four years from April 2017.
In the Autumn Statement in November, the Chancellor made two further announcements which will impact upon landlords. The first is that with effect from April 2016, those purchasing “additional residential properties” valued at more than £40,000 will pay an additional 3% stamp duty. This will apply to buy to let properties and second homes (but not an individuals’ principal home).
The Chancellor also announced that from April 2019 capital gains tax on the sale of residential properties will be payable within 30 days of completion of the sale (once again this will not impact upon the sale of an individuals’ principal home). Under the current regime, the capital gains tax is not payable until the 31 January following the end of the tax year in which the sale takes place (for those tax resident in the UK). Although this is not a tax rise, it will mean that the tax will be payable much earlier than has historically been the case.
These changes (and of course there could be more to come) have prompted many to consider whether holding their buy to let property in a company would be beneficial. Certainly many investors appear to be adopting this approach with lenders reporting a surge in mortgage applications from limited companies.
The answer to this question, as is often the case, is that “it depends”.
There may be some advantages in purchasing a buy to let property through a company. The changes to mortgage interest relief and the earlier payment date for capital gains tax are not expected to apply to companies, which pay corporation tax rather than income tax. If the rental income is not all immediately required, then using a company can be a useful way of building up funds as companies pay corporation tax on their profits at 20%, which compares favourably to the 40% and 45% rates of income tax payable by higher and additional rate taxpayers.
But (and there is always a “but”) using a company may not be right for everyone.
For those already owning a property, transferring the property to a company will result in stamp duty land tax and (assuming the property has risen in value) a capital gains tax liability. Although the rates of corporation tax are low, when the profits are extracted from the company, the recipient pays income tax. The rules relating to the taxation of dividends are also changing in April 2016 and, depending on the sums involved, there may be little or no tax benefit once the income tax on dividends is taken into account.
It appears that the additional 3% SDLT charge will apply to companies, unless they make a “significant investment in residential properties”, expected to mean 15 properties or more (although the precise scope of this exception is still subject to a consultation). This will not help most landlords.
Although it is relatively cheap to set up a company, there are ongoing administrative requirements and costs involved such as preparing and filing annual accounts and annual returns at Companies House.
And perhaps most importantly, the whole tax regime in relation to residential properties is in a state of flux. The plethora of recent announcements may not be the end of the matter. None of the changes described above have yet come into effect. The draft legislation for the additional 3% stamp duty surcharge has not yet been published. The Chancellor is increasingly clamping down on anything which he considers to be a loophole or anomaly in the tax legislation.
All of which means it would be unwise for landlords and prospective landlords to rush into using a company in a bid to avoid the proposed changes, only to find that the landscape changes again. Using a company may be suitable for some, but caution should be exercised before taking this route.
Scott Leonard is a partner in the Corporate & Commercial Team at Russell-Cooke LLP
Image: Lucius Kwok (CC-BY-2.5)