Buy-to-Let tax changes
In the recent budget the chancellor announced buy-to-let tax changes that will mean that tax relief will be cut for landlords from April 2017 as the relief will be restricted to the basic rate of income tax.
By the time the new measures have fully taken effect in April 2020 you will no longer be able to deduct mortgage interest costs from your buy-to-let taxable profits. Instead everyone will be able to claim a basic rate allowance for their buy-to-let finance costs, irrespective of their marginal rate.
This might lead many landlords into a situation where they consider putting their portfolios into corporate structures where they might not have felt the need previously. Putting a buy-to-let into a limited company will allow them to declare their mortgage interest payments as a business expense and can therefore avoid the new tax burden. With this in mind, we think it’s worth considering the pro’s and cons to doing this.
In order to weigh up the options we have to consider the costs involved in setting up and maintaining the buy-to-let limited company. Firstly, we need to consider that most limited company mortgages are currently fairly niche and therefore have increased costs and interest rates. More lenders might come into the market if this option becomes popular. However, currently there is quite a large differential in interest rate. In addition, setting up a buy-to-let limited company will incur one-off costs (stamp duty land tax, legal costs and potentially Capital Gains Tax) in order to move existing properties into the company.
With these costs in mind advisers have to be careful to make sure we work closely with the clients accountants to make sure that the advice we are giving is based on the clients particular circumstances rather than an assumption that it is more tax efficient to set up the limited company.
It’s worth noting also that currently most lenders insist that the limited company is a Special Purpose Vehicle (SPV) which is a limited company set up purely for the purpose of buying and selling property.
We also have to consider that once we have the property in the limited company it can be quite tricky to get it back out. Currently most lenders would allow a purchase from your own limited company as long as it can be considered an arm’s length transaction. This means that it’s a true purchase and that deposit monies change hands via the solicitor. It may appear clear that a client who is asset rich and cash poor could find it difficult to get the properties back out if required for any reason.
Landlords have until 2017 to review if this is going to be the best route for them and from there will be phased in till 2020. As we get closer to the deadline we may see some new lenders enter into this market or existing lenders may develop their policies and products.