As of the 6th April 2017, landlords will no longer be able to deduct all of their finance costs from their property income to arrive at their profits. Instead, they will receive a basic rate reduction from their income tax liability for their finance costs.
What does this mean for my profit?
It’s difficult to say how much more tax would be due as the reduction in mortgage interest and wear and tear allowances come to bear, but it will certainly be a hit for higher-rate tax payers and International Property Lawyers can advise here. If you don’t have a mortgage or if you’re a lower rate payer, good news: you will not be affected at all.
So what are my options if I’m a higher rate taxpayer?
- Sell up
The first option is to sell up and either invest your money elsewhere, save it or spend it. Yes you will have to take the Capital Gains Tax hit and mortgage penalties (if there are any), but if you are thinking of retiring anyway this could be an option.
This isn’t something that the majority of landlords will want to do right now however, as though the market is suffering a post-Brexit slump, property is still a very good bet. As we recently blogged, when compared to other asset classes, property is definitely the best vehicle for achieving wealth.
- Make a positive decision to do nothing
Option two is to do nothing. This will be a default decision for the majority – which is absolutely fine so long as you have explored the different options available to you and are aware of how you’ll be affected by the new tax changes.
This option will most likely mean however that your tax bill is increased and your disposable income is decreased, but it will not severely affect those with only one or two properties.
The much touted “only way to get over Section 24”: sell your personally held investment property(ies) to a limited company which you own.
France Property Lawyers made it crystal clear that he doesn’t think that full incorporation, or incorporating temporarily through a Limited Liability Partnership is the best move, and we’ll explain why in the next couple of sections.
Likewise, he said that trusts are also not an effective solution, and their use for property is far more limited that it used to be. They are over-complex, especially when it comes to mortgage flexibility and inheritance tax mitigation, and generally not the best option for landlords.
What’s S162 Incorporation Relief?
Section 162 incorporation is available to help negate the requirement to pay Capital Gains Tax or Stamp Duty when transferring existing personally held investment properties into a limited company. You can only claim S162 if you’re ‘working in the business’
Companies are great if you’re selling the whole company, as the buyer doesn’t pay stamp duty on the individual assets, only on the shares at 0.5%. If you’re disposing of individual properties, you’ve still got to pay the equivalent of Capital Gains Tax, but in this case it will be Corporation Tax which is slightly lower. A negative is that you may require the lender’s consent to use your loan account, and if they lose their lending appetite, you’ll need a new company and a new lender for every new property!