Buy-to-let tax relief
The buy-to-let market continues to grow and despite ups and downs over the years it can provide a good return on investment. Because of this you’ve decided to get in onthe action, but you’ll need to borrow to buy a property. The trouble is new rules will restricttax relief on loan interest and finance costs for higher and additional rate taxpayers from April 2017.
Tax relief lost
Over the course of three years higher and additional rate tax relief on mortgages for residential rental properties will be phased out so that by 5 April 2020 only basic rate tax relief will be allowed. For example, a higher rate taxpayer who pays interest of £15,000 on a buy-to-let loan will receive taxrelief of £6,000 for 2016/17. The tax relief will be halved to £3,000 for 2020/21.
Tip. Tax relief on loan interest and other finance costs relating to buy-to-let properties owned by companies won’t be affected by the new rule. Therefore, if you’re intending to buy a property consider doing so through a company.
Tax relief regained
Owning a buy-to-let property through a company will mean that interest relief is not lost when the rules change. However, any profit you make from renting the property (after corporation tax (CT) is paid on it) belongs to the company. Getting the money out of the company means paying income tax. The good news is that there are ways to do this tax efficiently. For example, taking a salary up to the NI threshold (approximately £8,100 per year), paying a similar salary to your spouse or partner, or taking dividends. The latter will still be relatively tax efficient despite the higher tax rate which applies from 6 April 2016.
Other tax advantages
Owning a property through a company offers further tax advantages. For example, if you have an existing trading company registered for VAT and it acquires the buy-to-let, you might be able to reclaim VAT on costs such as repairs and maintenance. Another tax advantage of corporate ownership occurs when the property is sold. Companies can claim an indexation allowance (to account for the effects of inflation) which reduces the tax payable on capital gains they make ( yr.12, iss.18, pg.3 , seeThe next step ).
There aren’t any specific disadvantages to owning a buy-to-let through a company, but whether you save tax by doing so depends on many factors, e.g. your income, your spouse’s income, whether you make a profit or loss on the property, whether theproperty increases in value, changes to the rates of tax, etc. (see The next step ).
Tip. Our advice is to draw up a projection of rental income and expenses over, say, five or ten years and an estimate of how much the property will increase in value over that time. Then ask your accountant to compare the tax outcome.
Reproduced with the permission of Indicator – FL Memo Limited. For subscription information call 01233 653500