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Tax advice every landlord must read

23 November 2015 / By: / Under: Landlords

Of all the new or soon-to-be-introduced legislation affecting buy-to-let investors, Chancellor George Osborne’s announcement that landlords will be prevented from claiming full tax relief on their mortgage interest payments from 2017 has caused the greatest anxiety. 

The government says only wealthier landlords will be affected by the changes, but they will push some lower-rate taxpayers into the higher tax bracket as a result of mortgage interest payments being excluded from a landlord’s costs when the rental profit is calculated.

This means landlords could not only receive a tax credit for their mortgage interest at the basic rate of tax, they face losing other payments, such as tax credits or child benefit, because their profits from property investment will appear greater than they really are.

As a property management specialist that has helped hundreds of landlords to maximise their rental incomes, Assetgrove explores how to avoid the full effects of tax breaks being gradually reduced down to the basic rate of income tax, currently 20%, by April 2020.

A petition has been started calling on Chancellor George Osborne to scrap the rule change, but the word coming out of Westminster is that he is not just turning a deaf ear to landlords, but will force buy-to-let investors – who provide homes for about 5 million households in the UK – to pay even more tax in the future.

Limited company option

A better option could be to move your buy-to-let property into a limited company structure and take out the profits as dividends because these are taxed less heavily than regular income.

From April 2016, landlords can earn £5000 in dividends free of tax, after which they will be taxed at 7.5% (basic rate), 32.5% (higher rate) or 38.1% (additional rate).

One advantage of this move is a landlord can limit the amount they take out of the company in dividends each year to avoid ending up in a higher tax bracket. It is also possible to make your children shareholders in the limited company and pay them dividends, which means they also get a £5,000 tax-free allowance.

But beware. If you have owned some or all of a buy-to-let portfolio for some time and its value has risen. Landlords could face having to pay capital gains tax of 18% or 28% on each property’s capital growth (less allowances and deductions) because they would effectively be selling them to the company. On top of this, the company would have to pay stamp duty on any property worth more than £125,000.

And if a landlord transfers a mortgaged property to a limited company, they will have to pay off the loan and apply for a new company mortgage, which could cost more than the original home loan.

However, setting up a limited company to buy rental property might make more sense for new buy-to-let investors.

Transfer ownership to a lower rate taxpayer

A simpler solution for higher-rate taxpayers who co-own a rental property with a lower-rate taxpayer might be to switch the majority of ownership to them, so they receive the bulk of the rental income.

However, if you are thinking of going down this route, you should speak to a tax advisor to make sure you do it correctly and that you are sticking to HMRC rules.

No matter what your situation and the scale and type of your portfolio, working with Assetgrove will allow you to manage your properties in a way that maximises profit while minimising stress.

Our rent guarantee scheme, for example, is the ultimate way to get ‘hassle free’ letting. Since 1975, we’ve been working with landlords to take the stress out of managing their rental portfolio by ensuring they receive fixed monthly payments even if a property is vacant.

Assetgrove offers up to five years guaranteed rent and will manage every aspect of the tenancy during this period – with no monthly fees, commissions or hidden surprises to pay for. This means we take care of everything – ensuring our landlords have complete peace of mind.

For more information on how you can ensure the rent you are due arrives on time every month and escape the day-to-day management of your rental property, contact Assetgrove today.

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