In November 2015,
George Osborne disclosed plans to restrain the buy-to-let (BTL) market,
implying its growing attractiveness was leaving aspiring first time buyers
contesting with landlords for the restricted number of properties on the
market. One of things he brought in was
that tax relief on BTL mortgages would be capped, starting in April 2017. Before April 2017, a private landlord could
claim tax relief from their interest on their BTL mortgage at the rate they
paid income tax – (i.e. 20% basic /40% higher rate and 45% additional rate).
So, for example,
let’s say we have a Dartford landlord, a high rate tax payer who has a BTL
investment where the rent is £900 a month and the mortgage is £600 per
month. In the tax year just gone
(16/17), assuming no other costs or allowable items …
·
Annual
rental income £10,800.
·
Taxable
rental income would be £3600 after tax relief from mortgage relief
·
Meaning
they would pay £1,440 in income tax on the rental income
And assuming no
other changes ... the landlord would have income tax liability’s (at the time
of writing May 2017) in the tax years of ...
· (17/18)
£1,800
· (18/19)
£2,160
· (19/20)
£2,520
· (20/21)
£2,880
Landlords who are
higher rate tax payers are going to have be a lot smarter with their BTL
investments and ensure they are maximising their rental properties full rental
capability. However, there is another
option for landlords.
The Dartford landlords who own the
4,744 Rental properties
in the town could set up a Limited
Company and sell their
property personally to that Limited
Company
In fact, looking at
the Numbers from Companies House – many landlords are doing this. In the UK, there are 93,262 Buy To Let
Limited Companies, and since the announcement in November 2015 – the numbers
have seen a massive rise.
· Q2
2015 / Q3 2015 – 4,193 Buy to Let Limited Companies Set Up
· Q4
2015 / Q1 2016 – 5,403 Buy to Let Limited Companies Set Up
· Q2
2016 / Q3 2016 – 3,007 Buy to Let Limited Companies Set Up
· Q4
2016 / Q1 2017 – 7,149 Buy to Let Limited Companies Set Up
So, by selling
their buy to let investments to their own limited company, owned 100% by them,
these landlords could then offset the costs of running their BTL’s as an
'allowable expense' - effectively writing off the cost of 100% of their
mortgage outgoings, wear and tear and upkeep, letting agent’s fees etc.
I am undeniably seeing
more Dartford landlords approach me for my thoughts on setting up a BTL limited
company, so should you make the change
to a limited company?
In fact, I have done some extensive research with companies house in the
15 months (1st January 2016 to 31st March 2017 and 67 Buy
To Let Limited Companies have been set up in the DA postcode alone).
Well if you are
looking to hold your BTL investments for a long time it could be very favourable
to take the short-term pain of putting your BTL’s in a limited company for a
long-term gain. You see, there are huge
tax advantages to swapping property ownership into a limited company but there
are some big costs that go with the privilege.
Finally, if the tax
liability is too high to swap to a limited company, some savvy buy to let
investors are leaving their existing portfolios in their personal name whilst purchasing
any new investment through a limited company?
Just an idea (not advice!).
It’s vital that
landlords get the very best guidance and information from tax consultants with the
right qualifications, experience and insurance. Whatever you do, always get the opinions from
these tax consultants in writing and you shouldn't hurry into making any hasty
decisions. The modifications to BTL tax
relief are being progressively eased in over the next three years so there is
no need to be unnerved and rush into any decisions before finding out the
specifics as they relate precisely to your personal situation, because with
decent tax planning (from a tax consultant) and good rental / BTL portfolio
management (which I can help you with) ... whatever you do - let’s keep you the
right side of the line!
