If like many you are a buy to let landlord, you must be feeling somewhat concerned by the material tax implications on your investment portfolio. If you then consider the additional stamp duty liabilities applicable, the requirement for careful planning must sit at the forefront of your mind.
All of a sudden your retirement planning should be reviewed in the context of the above. In recent weeks the Chancellor, George Osborne, announced that tax relief on buy-to-let mortgage interest payments would be cut (being phased in from April 2017) and that buy-to-let properties (as well as second homes) would incur an extra 3% stamp duty on purchase.
For those not involved in the buy-to-let market place, you might not appreciate the full impact of these recent changes. In the past one of the main advantages of owning a buy-to-let property was the ability to claim tax relief on mortgage interest payments, tax relief at your marginal rate of tax. This means that a basic rate taxpayer would get 20% relief, and those at a higher rate would receive 40%, and top-rate taxpayers 45%, all of which proved to be very tax efficient.
When the changes land, tax relief will become a flat rate of 20% irrespective of your marginal rate of tax position. The good news is that for landlords who pay basic rate tax they will see no change. The difference comes for those on higher incomes, who will find themselves paying much more in mortgage interest payments, further eroding their profits.
Last year the Nationwide Building Society published estimated figures of how a typical landlord’s profits might be hit. Someone with a £150,000 buy-to-let mortgage on a property worth £200,000, with a monthly rent of £800, would currently have a net profit of around £2,160 a year. Under the new system, the net profit would plunge to £960.
These changes could see a spike in the rents charged to tenants. Is this really the solution? Probably not. Tenants are already paying high rents, so further increases could force them to move out, creating potential rental void periods for the landlords.
Option 1: Take full advantage of allowed expenses
Make sure you are claiming as many of the allowed expenses as you can – expenses such as (a) Mortgage fees, (b) Letting agent fees, (c) Buildings insurance premiums, (d) furniture, (e) maintenance, (f) ground rent & service, (g) accountant costs for submitting your end of year self-assessment tax return
Option 2: Switch to a short term fixed mortgage rate deal
This will secure lower rates of interest. The clear downside to this is the risk of future rate rises, and the costs to re-mortgage every few years.
Option 3: Create a limited company
Place your property portfolio in a Limited Company structure, called a Special Purchase Vehicle (SPV). You would then be liable to pay corporation tax (which is lower) rather than income tax on your profits.
A drawback is that your mortgage options will narrow as fewer providers will lend to a company (but there are solutions out there), and you would need to factor in other potential tax liabilities, including Capital Gains Tax at the point of transfer into the SPV, and if the properties are then sold in the future.
Option 4: Transfer ownership to a spouse
You could transfer ownership of one or more properties to your spouse (if they pay a lower rate of income tax than you)
If you are a Buy-to-Let landlord affected by these changes, and would like more information on how best to implement a change to your strategy, please contact Chris Broome at MRIB on: email@example.com / 01494 455614