Amongst the plethora of recent taxation changes affecting UK residential property in recent years, the most concerning for private residential landlords has been the announcement in July 2015 that mortgage interest relief would be capped at 20% for individual landlords.
The finance cost restrictions are being phased in from 6 April 2017 through to 2019/20 such that from 6 April 2020 tax relief will only be available at the basic rate of 20%; this means that those individuals who pay tax at 40% or higher stand to be significantly worse off under these new rules.
As these changes don’t apply to incorporated businesses, many landlords are considering the option of operating their residential property business through a company. Corporation tax rates are 20% and set to decrease to 17% by 1 April 2020, so corporate landlords will be paying significantly less tax on their rental profits than individual landlords; but is incorporation the right solution?
Two Important Questions
Well, probably not for all investors but it may be for some. There are a number of commercial factors to consider but, in deciding the best course of action for you, it is important that you ask yourself the following two key questions at the outset:
Tax on Dividends
If you will need to extract the profits from the company, you are most likely to do this by way of a dividend. However, penal tax rates on dividends introduced from 6 April 2016 mean that any tax benefit from operating through a company could be wiped out; dividend tax rates can be as high as 38.1%.
Tax Implications of Transferring Properties into a Company
Transferring properties into a company may well give rise to upfront tax charges; tax reliefs may be available but the facts will need to be carefully considered. In many cases capital gains tax at 28% will be payable on the excess of the market value of the properties at the date of transfer over the original cost. Stamp Duty Land Tax will also likely be due, including the new 3% surcharge.
You will need to take other factors into account such as
The quantum of your finance costs, your total rental income and levels of other income,
There’s No ‘One size Fits All’ Solution
To conclude, whilst incorporation could be the answer for some landlords, especially those with high levels of gearing who can afford to leave the profits to accumulate in the company, one size definitely does not fit all. You should work through the numbers and consider the commercial factors before making any fundamental changes to the way you run your property rental business.
It can be a difficult decision, we can help you consider the tax implications of either scenario; take into account your circumstances; what you are looking to achieve from your investment in property and help you choose the solution that is best suited to your needs.
Please contact me if you would like to discuss your situation as a residential landlord.