In light of the changes announced by the chancellor, which attempts to extract more tax from your pockets we thought it might be a good idea to outline your options and what you can do about this. Tax relief for landlords is changing and you need to act not to avoid getting stung with large tax bills.
Interest rate relief
In case you haven’t heard from April 2017 the interest relief on buy to let mortgages will be restricted to the basic rate. At present if you are a higher rate tax payer the relief is at 40% so ultimately if you rent out multiple properties this could cause a large jump in your tax payments.
Wear and tear allowance
Even sooner in April 2016 wear and tear allowance for furnished properties will be restricted to the actual cost of replacing furniture. Currently you can claim 10% of your rental income a year against profits for wear and tear.
Take note of the term “replacing furniture” – this does not cover you for your initial costs of furnishing a house of new build when you first take the property on. This is because the initial furnishing of a property is deemed to be capital expenditure and as a result is not claimable.
For most landlords who rent furnished properties this is another blow and will ultimately mean more tax being paid over to HMRC.
However if your property portfolio includes student lets you might actually find yourself paying over less tax. This is because rental income for property lets are usually higher as a result of the high level or repair and furniture replacement – frequently this could cost much more than the previous 10% wear and tear allowance.
If you have furnished lets now might be the time to reevaluate your portfolio and consider switching to un-furnished before this tax change kicks in.
If you are a higher rate tax payer in a couple of years’ time you are about to be stung with high tax bills due to the restriction on interest rate relief.
One way to combat this is to set up a Limited Company and transfer the ownership of your property portfolio to the Ltd Company.
You still won’t be able to reclaim the higher rate tax relief like you can at present but instead of paying tax at 20% or 40% etc. you will pay corporation tax on the business profits which is currently 20%. You can then take a combination of salary and dividends in order to extract the business profits in the most tax efficient method.
Even better the rate of corporation tax will be dropping to 18% by 2020. This means that if you have a medium-large property portfolio the tax saved is likely to outweigh the cost of running a limited company.
If you are a property landlord and want to know more about the proposed changes or are interested in incorporating your property portfolio then give us a ring on 01202 331713.