Navigating SDLT reforms, however, is a sensitive and complex manoeuvre, and often calls for expert advice. In this edition of Clearer View, we have invited the Tax Team at Price Bailey Property to share key advice for buy-to-let investors.
Company ownership for buy to let properties
Many of the country’s landlords are starting to question the fairness of the UK tax system following the introduction of tax changes in the buy-to-let market in April.
Despite the financial implications of the reforms, many landlords have not considered how they hold their interests in property and what this means for their investment. While owning property personally is simple and requires minimum fuss, for many individuals, it isn’t very tax efficient, and we are anticipating that post-tax returns on property investments could be lower under the new legislation.
Potential tax advantages
Income Tax on rental profits can be anything up to 45%, which seems a significant imbalance given that companies currently pay Corporation Tax at 20%. This already favourable rate will reduce progressively to 17% over the next four years and may even drop as low as 15% - a figure previously quoted by George Osbourne, the ex-Chancellor of the Exchequer, following the result of the EU referendum. Therefore, if a landlord does not require rental profits on which to live, or if they are not being used to repay loan capital, establishing a private company to manage lettings portfolio starts to look attractive.
Furthermore, from 2017, loan interest will be restricted to Income Tax, but not Corporation Tax, further enhancing the appeal of the company model.
When residential properties are sold, individuals pay Capital Gains Tax (‘CGT’) of up to 28%, whereas on residential property gains, other than in limited circumstances, companies pay Corporation Tax at the lower rates mentioned above. In addition, companies are often taxed on a lower gain because they can claim an inflation allowance (known as indexation).
Shareholding and future planning
Corporate ownership allows a wide range of investors to participate as shareholders, rather than having direct interest in the properties. This also benefits Inheritance Tax planning, as assets can be passed to the next generation without having to transfer the property. For example, landlords can introduce their adult children as minority shareholders, or with generous grandparents, grandchildren can become shareholders, and dividends can be paid to them to fund school fees or other expenses, rather than grandparents paying out of their taxed revenue. Dividends can also be paid to the wider family group, which is likely to improve overall tax efficiency.
In summary, prospective and existing landlords should consider their ownership structure before making any further property purchases.
For those BTL landlords who own portfolios personally, it may be possible to move them into a new company structure; however, inadequate or poor advice could increase the risks of triggering high CGT and Stamp Duty Land Tax liabilities with no cash to settle them.
Price Bailey are a firm of chartered accountants and tax advisors who are experienced in this area, having successfully assisted clients reorganise BTL landlord property portfolios without incurring ‘dry’ CGT and SDLT charges.
Price Bailey are happy to give clients a free initial portfolio review to assess whether benefits can be had from the recent tax changes, as discussed above. Contact details can be found below.
Price Bailey Property Tax Team
Partner, Head of Property
T: +44(0) 207 7382 7431
Senior Tax Consulting Manager
T: +44(0) 1223 507 632
Partner Head of Residential Lettings
T: 020 7518 3234