Since the start of this tax year on 6 April 2017, landlords who pay income tax at the higher or top rate of tax have begun to be impacted by new rules on the deductibility of interest on mortgages used to buy residential property. Only 75 per cent of the loan interest will now be fully deductible against rental income, with basic rate tax relief only being available for the remaining 25 per cent.
Over the next few years full relief will taper away so that by 2020/21 all interest relief will only be given at the 20 per cent basic rate.
This has led those affected to consider whether property should be held in a company rather than personally. Full interest relief should be available to most buy-to-let properties held in a company, so on the face of it, it seems a better tax position – but is it?
The corporate tax rate is currently 19 per cent - and will be decreasing to 17 per cent in 2020 – so relief is only effectively given at the lower corporate rate. In the meantime, for personal ownership, some relief is still available at the high and top rates for the next few years.
Transferring existing properties into a company is likely to incur capital gains tax at 28 per cent on the increase in value since purchase and, on the basis there is loan interest, the transfer of the mortgage will likely be subject to stamp duty land tax (SDLT). The lender may also wish to charge a higher rate of interest where the property is held in a company. In some situations ‘property businesses’ could be transferred without capital gains tax or SDLT, but for many landlords this will not be the case.
Making an acquisition of property in a company could incur a higher rate of SDLT as well as triggering the requirement to file an annual tax on enveloped dwellings (ATED) return each year – even if no tax is due. This adds to the administration burden of a company, which also includes the need to file accounts and a corporation tax return (separate from personal tax returns).
Then there is the extraction of cash from the company – taxable either as dividend or salary, potentially returning the overall rate of tax to the same or greater than if tax had been paid directly.
So, should a company be used to own residential property? The answer is ‘it depends’. It is certainly not a panacea for all buy-to-lets and each situation should be considered carefully, taking into account the specific circumstances.
For more information please get in touch with Gary Heynes, or your usual RSM contact.