INCREASING taxation for private landlords, combined with the growth of the build-to-rent sector, has meant that more companies than ever before are being used for the letting of homes than at any time since our records began.
A series of recent changes to the tax regime have affected profits made by landlords who can no longer offset all their mortgage interest payments against tax nor than they claim the helpful tax relief for wear and tear of furniture and the like.
Landlords are selling up as a result and many of those who remain are choosing a company structure where there are a greater number of tax breaks, particularly for higher rate taxpayers.
By 2020, investors will only be able to claim mortgage interest tax relief at the basic rate of 20 per cent, regardless of their tax rate is higher (40 or 45 per cent).
By using a company structure instead, landlords will be charged corporation tax on their rental profits, rather than income tax at their marginal rate. Corporation tax is currently 19 per cent and is due to reduce to 17 per cent from April 2020.
However, there are disadvantages, too. The number of buy-to-let mortgage deals is more limited for companies, although mortgage lenders are beginning to better recognise the growth in use of a company structure by landlords. Those wishing to take income from the company will need to pay themselves dividends from the company, which can incur a further tax bill.
Stamp duty will apply, as property will have to be transferred at market value by the company from the individual when setting up this structure, even though the ultimate owner remains unchanged. For this reason, few landlords transfer their existing properties into a company structure but make new purchases through the company.
Capital gains tax (CGT) must also be considered. This is a tax on the gain in value of the property the amount an asset has risen in value during ownership. Individuals receive an annual tax allowance, £12,000 in the current tax year, but companies do not.
CGT is often the major issue for landlords looking to transfer their existing properties into a company structure, as they will generally have a tax liability, based on how much their property has increased in value since it was purchased, but do not necessarily have the funds to do so.
There are ways landlords can use to lessen the CGT burden, for example the Enterprise Investment Scheme (EIS).
EIS involves investing in fledgling, often unlisted, companies and gives income tax relief of 30 per cent in the year of investment and a deferral of the CGT. The CGT deferred needs to be reinvested when each EIS investment matures to keep the tax break and to avoid the withdrawal of the income tax relief the EIS assets must be held for a minimum of three years. An EIS investment which is held for more than two years is excluded from your estate for inheritance tax purposes.
Careful planning and advice is required before changing the way you run your buy-to-let properties.
For more information, contact Baldwins on 01536 514871.