Earlier this year, the Chancellor George Osborne announced major plans to restrict tax breaks for residential buy-to-let landlords which would see half of their profits wiped out.
Gradually being phased in over 4 years from April 2017 the change means mortgage interest payments will be restricted to just 20% of interest.
Under current rules, a 45% taxpayer with an annual net rental income of £21,000 and annual mortgage interest of £10,000 would retain £6,050 after tax. This could be cut to just £3,550 under the proposed plans once the rules have been implemented fully.
Current Rules 2020/201
Net Rental Income Before Interest £21,000 £21,000
Interest Paid £10,000 £10,000 (not Tax Deductible)
Taxable Profit £11,000 £21,000
Tax Charge at 45% £4,950 £9,450
Tax Credit at 20% of Interest (Not Applicable) £2,000
NET INCOME AFTER INTEREST £6,050 £3,550
Property Tax Planning
Transferring Jointly Owned Property
Subject to meeting the relevant conditions and providing suitable evidence, existing landlords may benefit from transferring property interests to spouses on lower tax bands possibly using Form 17 (Declaration of Beneficial Interests in Joint property and Income). Contact us for further advice.
Higher and additional rate tax payers could potentially benefit by holding rental property in a limited company.
Not only can limited companies offset the full mortgage interest payments against their tax bill. Rental profits are taxed at the corporation tax rate of 20% (set to reduce to just 18% from 2020), as opposed to up to 45% if held personally.
There are potential Stamp Duty Land Tax (SDLT) and Capital Gains Tax (CGT) charges that may be payable on transfer of a property to a limited company. However this is not always a problem and the position needs to be reviewed.
The limited company may be particularly tax efficient if it is intended to retain profits in the company for future expansion or to pay down debts.
Holding investment property in a limited company is not suitable for every landlord and careful planning is required before taking any action. Contact us for further advice.
Buy that dream Spanish villa!
Properties that are let furnished as holiday accommodation whether in the UK or in Europe benefit from a range of tax reliefs not normally available to ordinary buy-to-let landlords, including full mortgage interest relief. This could increase the attraction of buying that dream villa!
Strict rules apply to qualify as Furnished Holiday Lettings, including being available for let to the public for at least 210 days per year AND be actually let for 105 days per year. Contact us for further advice.