I’m sure many landlords will be aware of the significant changes in legislation likely to erode their taxable income. Below is a quick walk through the changes and how we could help alleviate the impact!
Changes to legislation for B2L landlords:
Tax relief on finance costs will be restricted to basic rate tax from 2020, this being phased in from 2017 – 2020. Relief on interest payments had been integral to the growth of the buy-to-let market but now landlords with leveraged properties will face an increased tax burden – this could net the Government an additional £665m is the expected revenue from landlords alone in 2020.
The basic rate of capital gains will be cut from 18% to 10% and the higher rate, from 28% to 20% from April 2016. However the gains made on residential property sales will not be eligible for these new lower rates. Instead, the Chancellor has maintained the existing rates, equal to an 8% surcharge so those with buy to let portfolios and second homes will pay more.
What does it all this mean?
From April 2016 the new 3% additional SDLT on B2L’s and second homes will apply to both personal and corporate holdings, this was confirmed in the Budget on 16th March and will apply to the full purchase price.
From April 2016 the ‘wear and tear allowance’ will be scrapped, the tax relief will only apply only to the costs they actually incur while doing so.
From April 2017 landlords will no longer be able to deduct (all) finance costs from their property income to arrive at their property profits phased in until 2020 – reducing by 25% pa.
Worst affected will be the highly leveraged portfolios where equity has been released to reinvest.
From 2020/21 rental profits will be assessable at the appropriate marginal rate with finance costs allowable as a “tax reducer” at 20%. This is likely to push many basic rate tax players into higher tax brackets turning a previous profit into a loss.
Example: 2015/16 2020/21
Rent £200,000 £200,000
Finance £ (150,000) £ (150,000)
Tax at 45% £ (22,500) £ (90,000)
Tax Reducer at 20% (nil) £30,000
Rental profits £27,500 £ (10,000)
What can you do next?
We can achieve significant savings by transferring the properties to a limited company and apply various tax reliefs so as not to trigger either the Capital Gain already accrued OR the Stamp Duty Land Tax.
- Loan interest restrictions – once within the corporate structure you will be able to leverage the properties and obtain a full tax deduction on the loan interest paid.
- From April 2019 any capital gains tax will be due within 30 days after the disposal, unlike currently when the deadline is 31 January following the end of the tax year of disposal. Companies will still retain their 9-month deadline for any tax due.
- Inheritance Tax can also be dealt with in a number of ways to protect assets for the next generation.
- Borrowing – it may be possible to transfer only the beneficial ownership of properties to the company thereby leaving the legal title and not affecting any lending facility.
Whilst tax charges within a company structure must be considered, there are a number of additional tax advantages to this base cost uplift, such as inheritance tax and succession planning.
If you would like to review your situation, please contact me on 07917 356356
Our bespoke advice is implemented by experienced Chartered Tax Advisors withparticular expertise in advising on tax efficient property structures, capital taxes, stamp duty land tax and corporate taxation.
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