Friday 29 January 2016

Beat the tax trap by owning buy to let properties in Aylesbury through a company

From time to time I come across articles that are worth sharing with landlords. On this occasion Keith Witchell has agreed I can post his article for your benefit on the Aylesbury Property Blog...


Following changes to tax relief for buy to let properties announced in last year’s Summer Budget, individuals that own rental properties are being hit hard. Here’s a quick re-cap of the forthcoming changes:

 · 
Tax relief for mortgage interest on a buy to let property to be restricted to 20% by 2020;
 · 
10% wear & tear allowance for furnished lettings to be scrapped from April 2016

In addition we have the 3% stamp duty hike on second properties which arrives in April and, although this equally applies to limited companies (in most cases), it is fair to say that higher rate taxpayer property owners are being targeted by the taxman.

So what can you do about it? One option is to own properties through a limited company, which pays 20% tax on its rental profits and is not affected by the mortgage interest relief restriction mentioned above.

In the past owning properties through a company was not tax efficient in most cases, due to the much feared double tax on the increase in value of the properties when sold. This is because the company will pay Corporation Tax on any capital gain made when it sells a property PLUS the shareholders would pay income tax (in most cases) when they withdraw the profit as dividends. This compares unfavourably to the capital gains tax that an individual property owner would pay.

However, there have been lots of changes over recent years that make property ownership via a company more attractive.

Firstly, companies get indexation allowance which allows property values to increase by a measure of inflation (linked to RPI) before any tax is due on the increase in their value. Individuals do not get indexation allowance, although they do benefit from the Capital Gains Tax annual exemption.

Secondly, if rental profits are not used to supplement income but instead are saved up to buy further properties, then company ownership works well as Corporation Tax is at 20% and there would be no personal tax for the company owners to pay. Compare this to 40% tax on rental profits for many investors and the company structure starts to make real sense.

Thirdly, we have the new dividend allowance. From April 2016, even higher rate taxpayers can earn up to £5,000 a year in dividends tax free. So if the investor is a higher rate taxpayer already and they are not using the dividend allowance on any other shares, then holding their properties via a limited company allows them to withdraw some money from the company tax free each year, effectively meaning the tax on rental profits remains at 20%.

Fourthly, the Corporation Tax rate is due to reduce from 20% to 18% by 2020.

Taking the above factors and then adding in the changes to mortgage interest relief for individual property owners really builds a case for company ownership. Plus it is a very flexible structure, allowing other family members to hold shares.

In addition, for people who already have a trading company and intend to use funds from that company to invest in buy to let properties it often makes sense to form a group of companies with a separate property company that sits alongside the trading company. By doing so the funds for the purchase do not need to be withdrawn from the trading company and therefore personal tax can be avoided, while the properties are effectively ring fenced from the trading activities.

So are there any downsides? The main downside is that the property company will need to prepare annual accounts and file these at Companies House together with an Annual Return, plus a Corporation Tax return will need to be prepared and submitted to HM Revenue & Customs. This all represents an annual administrative burden/cost which is likely to outweigh the tax benefits of company property ownership for those with only one or two properties. However, for those with three or more properties the company ownership model really starts to make sense.

A further downside is that there are fewer mortgage lenders that will lend to limited companies and therefore interest rates tend to be higher. However, with more and more people looking to own properties via a company demand is increasing and more lenders are expected to enter the marketplace which should drive interest rates down.

Is there anything else to consider? One important point is that if you already own properties personally then transferring them to a company will generally be subject to stamp duty based on their current market values (with a 3% hike in stamp duty rates from April!). Capital Gains Tax is also triggered, although this can be avoided in some cases using incorporation relief.

Keith Witchell

Keith Witchell ACA FCCA CTA

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