Due to the recent tax changes impacting the Buy to Let investors, we look at the pros and cons of running buy to let investments via a Limited Company structure.
In his final Budget, George Osborne made life more taxing for landlords. Within a 12-month period, existing and prospective landlords saw reforms to both their acquisition costs, through a 3% Stamp Duty levy imposed on non-primary residences which came into effect in April 2016, and now face a raft of measures to reduce the tax breaks enjoyed by landlords, ultimately cutting their profit and in some cases eradicating their rental profits all together.
Mortgage interest relief
From April 2017, landlords will no longer be able to claim the entire mortgage interest payments associated with their buy to let as a tax deductible expense if they fall into higher or additional rate tax brackets, and will be charged an additional 20% or 25% tax on their interest payments respectively – any profit made on letting the property thereafter will be subject to their highest marginal rate of tax.
This change will be phased in over a 4 year period; however the impact on profits for landlords will be immediate.
Wear and Tear Allowance
In April 2016 the allowance was abolished and replaced with a “prove it” style system, which only takes account of the actual value of repair works carried out to the property during the financial period.
What this new measure doesn’t fully take account of is the depreciation of fixtures and fitting. For example, the loss in property value over time as your kitchen becomes dated.
Do these changes apply to both individual landlords, and corporate landlords?
Properties owned by a limited company are not affected by these changes and for many it may appear that the previous chancellor left the door open for a mass migration of personally owned by to lets into a company structure.
However, moving a property into a corporate structure will inevitably incur some tax liability in the form of stamp duty, with the 3% levy added on top, and Capital Gains tax should the property have increased in value. Both are calculated at the open market rate of the property.
Investors should also consider a largely unknown tax which could scupper their plans – or at the very least, alter the corporate structure used to own a buy to let.
The Annual Tax on Enveloped Dwellings, or ATED, was originally introduced to make it less attractive to hold a high value property, worth in excess of £2m, in a limited company structure.
From April 2016, the £2m taxable value was reduced, putting any property worth over £500,000 firmly within the grasps of ATED. Properties falling inside this tax face an even higher rate of Stamp Duty, an annual tax levy and Capital Gains Tax on the disposal of the asset.
Fortunately, there are exemptions; however it is crucial that your company is formed correctly to benefit from these.