Buy to Let Landlords
How the changes announced in the Summer Budget will affect you.
Restrictions on finance costs will be introduced gradually from 6 April 2017. This will have a direct implication on profits for landlords since they will no longer be able to deduct all of the finance costs incurred from their property income to determine property profits. Instead they will receive a basic rate reduction from their income tax liability for the finance costs.
• in 2017 to 2018 the deduction from property income (as is currently allowed) will be restricted to 75% of finance costs, with the remaining 25% being available as a basic rate tax reduction
• in 2018 to 2019, 50% finance costs deduction and 50% given as a basic rate tax reduction
• in 2019 to 2020, 25% finance costs deduction and 75% given as a basic rate tax reduction
• from 2020 to 2021 all financing costs incurred by a landlord will be given as a basic rate tax reduction
Based on an accounting profit of £90,000 for the year ended 31 March 2014, with finance costs of £240,000 and excluding current claims for capital allowances, a landlord would ordinarily pay approximately £24,000 income tax. This comprises tax at the rates of 20%, 40% and includes a deduction for personal allowance (using £11,200).
According to the changes recently announced, finance costs covered by the new measures will include mortgage interest, interest on loans-to-buy furnishings, and fees incurred when taking out or repaying mortgages or loans (currently of course, there is no relief available for capital repayments of a mortgage or loan). Thus the accounts figure comprises bank interest, card charges, etc., but predominantly mortgage interest, all of which have been included as shown in the examples below.
As a result of the new changes, landlords will suffer additional personal tax if their profits and interest payments remain consistent with the year 2014:
• 2017/2018 an extra £7,000
• 2018/2019 an extra £16,000
• 2019/2020 an extra £22,000
• 2020/2021 an extra £27,000
Where total income falls within the basic rate band, including your personal tax, say a total of £43,600 each, the restrictions will have no impact on your personal tax position. Where it is not feasible to ensure that your income falls below this amount, it may be worthwhile considering the incorporation of your property partnership.
These figures do not take into account the professional fees incurred to incorporate the business and the additional annual fees in dealing with the company’s compliance obligations.
Consider incorporation of the partnership business
As previously mentioned, the restrictions shown will not apply to a limited company. The following examples are based on calculations where a profit figure above £90,000 indicates whether incorporating the business immediately would be advantageous from a tax perspective.
Extraction as dividends
If profits of £90,000 were extracted in full by way of dividends only, and based on two partners having no other income, the potential ‘cash in hand’ position after all taxes paid would be approximately:
• 2017/2018 – £4,750 better off for the year
• 2018/2019 – £13,250 better off for the year
• 2019/2020 – £19,750 better off for the year
• 2020/2021 – £24,500 better off for the year
Tax implications of incorporation
Subject to various criteria being met by the partnership, certain taxes may be deferred on the transfer of the partnership’s property business to the company.
This is particularly relevant to any Capital Gains Tax (CGT) that would arise on the uplift in value of each property since acquisition. Usually the gain would be reported and the CGT paid to HMRC at the point of transfer (which is prohibitive where no cash has been realised to cover the tax). Rollover relief is particularly valuable in these circumstances; assuming ALL the assets of the trade are transferred to the company in exchange for shares, the gains that arise can be rolled over to cover their costs.
The Stamp Duty Land Tax (SDLT) can also be prohibitive where properties are transferred to the company (a connected person) and SDLT would be payable on the open market value of each property. However, providing various criteria have been met by the partnership, it is possible that SDLT would not be payable on the transfer.
Wear and Tear Allowance
From 6 April 2016, the Wear and Tear Allowance is to be withdrawn. Alternatively, HMRC will allow for actual costs expended on furnishings and moveable items of a furnished residential property, to be claimed as a tax deduction. This will reduce the impact of the change on an individual’s personal tax position.
Where expenditure on items currently covered by the Wear and Tear Allowance may be imminent, such as on furniture, fridge, freezer etc, it may be appropriate to defer purchase until after 6 April 2016, providing an opportunity to take advantage of the full available allowance for the current year (2015/2016); relief on expenditure incurred on or after 6 April 2016 could then be claimed.
NB: The figures and examples shown here are based on current information released in the latest Budget Statement. The complexity of the new legislation and its implications and impact are still being assessed therefore figures shown cannot be taken with absolute certainty.
Please contact us if we can help you with these or any other tax or accounts matters. In addition, if there’s anyone else who you think would benefit from the newsletter, please forward the email to them or ask them to contact us to be added to the newsletter list. If you are not already a client and are interested in becoming one, we would be more than happy to meet with you to discuss how we can help and provide you with a competitive quote for our services. All new client consultations are provided free of charge and without obligation.