Changes to property tax and how they could affect you

The changes that we’re expecting to see to property tax after George Osborne’s 2015 Autumn Statement has the potential to impact upon a number of our clients, especially those that have invested in buy-to-let properties and thus have a property portfolio listed in their personal name.

In the announcement, Osborne stated a proposed 3% increase to Stamp Duty Land Tax (SDLT) rates on purchases of additional residential properties, such as buy-to-let properties or second homes[1]. These new changes will take effect from 1 April 2016, so it’s important to get your plans in place before this date.

The 2015 Summer Budget is also a game changer for all owners of residential investment property funded by a mortgage. In a nut-shell, you will soon not be able to offset all your mortgage interest against your rental income, and as a result you may pay more tax. You could possibly be making a loss as a direct result of this new tax. Here is a bullet point summary of the changes:

  • As a result you may now pay tax on a proportion of your largest operating expense as though it is income
  • If and when interest rates rise, you will be deemed to have made more taxable profit and therefore may pay more tax
  • It is unlikely you will be able to raise rents by enough to cover the extra tax
  • If you have high borrowings you may be making a small profit now, but will be plunged into loss with the new tax rules
  • It’s not just mortgage interest that won’t be allowed as an expense but also loan arrangement fees, bridging loan interest and loan interest from private investors
  • In addition to the above, if you rent out unfurnished accommodation, the 10% wear and tear allowance is being removed

All of the above changes will take effect from 2017 and will be fully implemented by 2020.

‘Incorporation’ may be a solution. This is the process of selling a property portfolio from individual ownership to Limited company ownership. Once the sale is complete, Limited corporation tax rates will apply to rental income and all mortgage interest can be offset as an expense. Corporation tax rates on rental are likely to be lower than personal income tax rates, but other changes in the budget in relation to dividend taxation may impact on your decision to incorporate.

The changes in the budget do not affect UK limited companies that own residential investments funded by mortgages and here in lies the opportunity for investors to re-structure the ownership of their property portfolios. Advice is essential as it is a very complex consideration and there could be other tax implications and costs involved.

Our team at Cameron Chase is able to offer guidance for those looking to minimise the impact in regards to their property portfolio and we are happy to talk through any concerns you may have.

[1] Bedrock Tax – http://www.bedrocktax.co.uk/tax-changes-affecting-property-owners/

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