I would like to preface this blog by stating that I am not a tax adviser and you should seek advice from a qualified tax accountant proficient in the area of property tax advice.
Over the past year or so – since changes in tax legislation were announced by the Chancellor of the Exchequer at the time George Osborne – we in the mortgage market have seen some significant growth in Limited Companies buying property rather than individuals. Here I’ll try to shed some light on why this has come about and what you should be aware of if you are thinking of going down this route.
What are the Tax Changes?
So the most publicised tax change was that of the additional three percent stamp duty on second homes. Do not be mislead by the term ‘second home’ though; this is not just a tax on your cozy cottage in Cornwall, but also a tax on landlords. The stamp duty applies to all rental properties, in fact all properties other than your main residence. This has stung some people where, for example, you might decide you want to rent out your current home and buy another to live in (also known as “Let to Buy”). Even though this new property will be your main residence because you are not selling your existing main residence the 3% charge still applies.
It is not the Stamp Duty levy that is the big change though, it is the income tax changes. Although many landlords are aware of the changes coming in, recent research conducted by specialist lender Foundation Home Loans suggests 60% of landlords didn’t understand what was said in the last budget. From the tax year 2020/21 those taxpayers in the 40 and 45% brackets will only be able to claim tax relief of finance costs (mortgage interest to you and me) at the rate of 20%. This is best shown in a simplified worked example:
Mr Jones and his Buy to let ambitions…
Mr Jones has a day job earning £55,000 a year and wants to buy a property to rent out. Does he go for it as a private individual or should he look at buying the property with a limited company and draw a dividend?
The monthly rent will be £800 and the mortgage interest will be £500 a month with a further £100 in running costs associated with the property.
* Running costs for the limited company example include £13 Confirmation Statement submission fee and a £500 allowance for accountancy. In 2016/17, the £12 Companies House registration fee has also been included.
** As Mr Jones’ dividend income is less than the £5,000 Dividend Allowance, he is not liable to pay tax on his dividend income
*** Date courtesy of Foundation Guide March 2017
Under the new tax legislation around buy to let Mr Jones is going to end up seeing a big reduction in his potential income. In this simple example Mr Jones could receive an additional £3,432.75 income by the property being owned by his Limited Company rather than by him personally.
The new legislation will affect higher rate tax payers and may take some basic rate taxpayers into a higher rate band thus affecting them too.
There is a certain amount of uncertainty around how this new tax legislation will affect the market. It may lead to some portfolio landlords selling off some property. This could well be what the legislation was designed to do. As ever the mortgage market is appearing to be innovative and the limited company buy to let route may well be something we see an awful lot more of in the future. Always seek tax advice from a suitably qualified accountant though.