By the tax year 2020/21, the current 100% tax relief for finance related costs will disappear completely and only a 20% tax credit will be available.
Thousands of landlords are transferring their properties into limited companies to minimise the impact of the phased reduction in tax relief that starts in April. This was clearly illustrated by research from lender Kent Reliance, that showed that in the first nine months of 2016, the number of limited company loans taken out by landlords buying properties was already double the number taken out in the whole of 2015.
By the tax year 2020/21, the current 100% tax relief for finance related costs will disappear completely and only a 20% tax credit will be available. In practice, the changes will mean that landlords will be assessed for tax based on their gross income, including rent, and then receive a 20% rebate. This will hit additional and higher rate tax payers, who constitute the majority of landlords in London, particularly hard. A higher rate tax payer could see his net profit reduce by around two thirds and an additional rate payer could see his net profit plummet by up to 91%. However, a basic rate tax payer will see very little difference.
These changes have prompted many landlords to consider transferring their properties into limited companies to minimise the impact of the new tax regime as they will avoid income tax and just pay corporation tax at a current rate of 20%, which is expected to drop to 17% by 2020.
However, incorporation for this type of business is rarely a straightforward exercise. There are possible stamp duty and capital gains implications, although regulations do exist that may allow incorporation without giving rise to an immediate liability to CGT or SDLT known as S162 relief. However, this will not be possible in many cases as it effectively requires you to prove that you are already operating as a business and merely incorporating as the next step. Moreover, if landlords have mortgages, transferring the properties to a company may result in higher interest costs, because residential mortgages are not available to companies, and new loans would need to be negotiated.
If you are a landlord and would like to discuss your tax planning options and making the most of your allowances, please leave your details here and someone from our wealth management partner, St. James's Place, will be in contact.
St. James's Place Wealth Management plc is authorised and regulated by the Financial Conduct Authority. St. James's Place Wealth Management plc Registered Office: St. James's Place House, 1 Tetbury Road, Cirencester, Gloucestershire, GL7 1FP. Registered in England Number 4113955.