Tax changes announced during 2015 will increase costs for many buy-to-let landlords and may make some lettings unprofitable. But there may be ways of mitigating some of these costs.
The summer of 2015 budget ushered in the removal of higher and additional rate income tax relief on the costs of buying a residential property for letting, a change that will be phased in over four years starting in 2017/18. Owners of commercial property and furnished holiday lettings will still be able to get full tax relief for interest, so one way of avoiding the restriction will be to diversify into these types of properties.
Another possibility is to hold properties in a company. Companies are not affected by the restriction on interest relief and moreover by 2020/21 the corporation tax rate will have fallen to 18%. Against this benefit must be set some costs. Further tax will arise if income is drawn from the company, though from April 2016 every individual will have tax-free dividend allowance of £5,000. Spreading ownership of the company’s shares among family members, especially those who do not pay more than basic rate tax, will reduce the tax on distributions.
The 18% corporation tax rate will normally also apply to a company’s profits on selling properties. Furthermore, companies benefit from an indexation allowance which reduces the chargeable gain. However an individual who withdraws the profits will have to pay further tax, so the low corporation tax rate is most valuable if profits are to be reinvested within the company.
A major downside to incorporation
is the capital gains tax and stamp duty land gains tax (SDLT) on the transfer of properties to a company because these taxes will be based on the market value of the properties. Therefore the corporate structure is most useful for new investment in residential property.
Holding property in a company will not, however, avoid the 3% added to SLDR rates on purchases of buy-to-let property, though the government is considering some exemptions for both companies and individuals.
If you are thinking of investing in property, do consult us first because there are many factors to consider.