Following the Summer Budget and the recent Autumn Statement, Buy-to-Let Landlords may be feeling under attack from the Chancellor who appears intent on making Buy-to-Let investment a less attractive proposition in the future. His approach seems to be that Buy-to-Let Landlords are squeezing out first time buyers and distorting the market due to the availability of tax reliefs on their purchases. This attack started in the Summer Budget and has been sustained with the recent Stamp Duty changes in the Autumn Statement.
Read our - Buy to Let Tax Checklist
The changes announced in the Summer Budget relate to the gradual phasing out of higher rate tax relief on interest on loans taken out to finance rental properties. Over the next years through to 2020, Higher Rate Tax Relief on loan interest will gradually be withdrawn to the point so that, by 2020, Basic Rate Tax Relief is all that is available. This will have a major negative impact on those Landlords who have borrowed heavily to finance their property portfolio. By 2020, the gross rental income will be taxed at the taxpayers highest marginal rate of tax yet the off-set of loan interest will only be at a basic rate. This could make the whole investment uneconomic on an annual basis in both terms of cash flow and taxation.
The Chancellor followed this up with a further blow in the Autumn Statement by announcing that at all levels, there will be a 3% surcharge on Stamp Duty for individuals buying second properties, whether this is for rental or for use as their own holiday home. This will add a significant cost to the purchase price. Even if the purchase price is within the nil rate band of Stamp Duty, the Buy-to-Let property will still attract 3% Stamp Duty under the new rules. There will be the possibility of off-setting this against any future Capital Gain, but this relief could be a long time into the future!
A further change is also being made to the payment date for Capital Gains Tax (CGT) from April 2019. Currently CGT is due on 31st January following the tax year of disposal. This will change so that the tax becomes payable within 30 days of disposal. This is a major acceleration of the tax payment date. We are not sure yet whether this will also apply to limited companies.
So What Can A Buy-to-Let Landlord Do?
Due to these forthcoming changes, the case for investing into Buy-to-Let properties through a limited company might be more attractive than before. A limited company will still be able to claim full tax relief on loan interest against its rental income in the future. In addition, the rate of Corporation Tax on profits made by limited companies is coming down to 18% by 2020.
In addition, the rate of Capital Gains Tax (CGT) paid by a company is the same as the Corporation Tax rate, which may be lower than an individuals’ higher rate CGT of 28%. A further bonus is that companies can claim Indexation Allowance, so the cost of property to set against any proceeds in the future will take inflation into account. An individual does not have this benefit. Also at the point of extracting dividends from the company, the new dividend rules from 6 April 2016 means that each shareholder can receive dividends of up to £5,000 without paying any further tax on those dividends regardless of their own marginal tax rate.
Read our - Buy to Let Tax Checklist
It may not necessarily be a good idea to transfer existing properties into a limited company due to the possible CGT and Stamp Duty costs. Each case would need to be looked at separately.
All in all, the route for Buy-to-Let Landlords seems to be moving away from individual/personal ownership towards ownership through a limited company. It remains to be seen whether this route will also be taxed by the Chancellor who seems intent on reducing the number of rental properties on the market.