The Wire: Spring 2020 – Buy to Let tax changes and the rise of Limited Company lending

Buy to Let tax changes and the rise of Limited Company lending

Over the last five years, successive Conservative governments have kept the Buy to Let sector high on their agenda. A raft of tax and legislative changes have made life increasingly hard for landlords, with David Cox, director of the Association of Residential Letting Agents, calling the changes ‘an outright assault on the sector’.

More Buy to Let changes come into force in 2020 which will particularly hit higher rate taxpayers. Here’s your guide to the recent and upcoming Buy to Let changes, and why more and more investors are turning to Limited Company lending.

Mortgage interest tax relief changes

Since April 2017, tax relief on mortgage interest has been gradually phased out. 

In the 2019/20 tax year, it is possible to deduct 25% of mortgage interest from rental income but, from this April, landlords will no longer be able to deduct any of their mortgage interest.

Instead, landlords will receive a tax credit, equivalent to 20% of their mortgage interest payments.

Source: Which?

This new system will potentially increase a landlord’s tax bill in two ways:

  1. The new system is less generous for higher rate taxpayers (who effectively received 40% relief in mortgage payments under the old rules). So, landlords who are higher or additional-rate taxpayers will only receive the tax credit at the basic rate of 20%.
  2. Landlords could be forced into a higher tax bracket because they will need to declare the income that was used to pay the mortgage on their tax return. This could push the total income into the higher (£50,000 in 2019/20) or additional-rate (£150,000) tax brackets, depending on income from other sources, such as salary or pension.

Changes to Private Residence Relief (PRR)

PRR is a Capital Gains Tax (CGT) relief you can claim on the sale of your main home. If you’re selling a property that has been your main residence for only part of the period you have owned it, the last 18 months of ownership has historically been a period of ‘qualifying occupation’ for the purposes of PRR.

New proposals that are set to come into force on 6 April 2020 half this period to the last nine months of ownership.

This means that if you’re buying a new home after 6 April 2020 before selling your old one, you will need to ensure the sale takes place within nine months. If you don’t, there could be a potential CGT charge.

Lettings Relief

Lettings Relief also applies if you sell a property that you have only lived in as your main residence for part of the period of ownership.

Currently, using this relief, when you sell the property, £40,000 of your gain is exempt from Capital Gains Tax. From April, the relief will only apply where you co-habit the property with the tenant.

As a result, the relief (currently worth up to £11,200 of CGT), will be lost unless you lived in the property at the time it was tenanted.

Potential Stamp Duty changes

Since 2016, investors have paid an additional 3% Stamp Duty surcharge on second homes.

There has been a lot of speculation that a new Stamp Duty surcharge could be introduced for foreign investors buying property in the UK. Watch this space.

The rise of Limited Company Buy to Let lending

The various tax and legislative changes that have been introduced over the last five years have hit landlords hard. A survey in 2019, published in FTAdviser, found that more than a quarter of landlords were planning to sell at least one property from their portfolio in the next 12 months.

Another way that many landlords have responded to tax changes is by running their rental business through a limited company. The main reason is that operating a property business as a limited company means the personal tax rules don’t apply.

For example, if a company owns a single property or property portfolio, it is Corporation Tax that is paid on the profit of the business. As this is currently 19%, it makes the idea of holding properties within a limited company or SPV (Special Purpose Vehicle) quite attractive.

In a recent Foundation Home Loans landlord survey, almost two thirds (64%) of landlords planned to make their next purchase within a limited company vehicle.

If you’re considering buying using a limited company, or transferring your property holdings into such an entity, it can pay to seek proper advice. There are a range of implications to consider including:

  • Stamp Duty
  • Lending criteria for new mortgages and a smaller choice of mortgage deals. In November 2019, data analysts Moneyfacts found that, of the 2,600 Buy to Let mortgage products available, only around a third (33.7%) were available for Limited Company/SPV lending 
  • The potential for personal tax when withdrawing income from the company.

Jeff Knight, director of marketing at Foundation Home Loans, said: “The rise in limited company usage by landlords shows no sign of tailing off, particularly as we have a more professional landlord community who recognise the benefits of using such a vehicle.

“It’s therefore perhaps no surprise to see a growing number of landlords signalling their intention to make their next purchase through a limited company.”

If you’re looking for advice about structuring your property investments, please get in touch. Send us a message via the HFMC Wealth website or call us on 020 7400 4700.

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