I have been asked about rental properties this week and how to avoid the restrictions on interest deductions. In other words the problem that interest on buy to let (BTL) mortgages is only allowed at 20% against taxable income. That means if you are a higher rate tax payer you will end up with a bigger bill, and to make things worse the weird way they are calculating the tax restriction means that (a) you effectively pay on turnover; and (b) you may lose out on benefits (principally child tax credit). It is quite possible to actual pay over 100% tax on profits. Hardly a case of “the right amount of tax”.
Anyway, what to do about it? Well, companies are exempt so transferring properties to a limited company would seem like the obvious answer but there are 3 problems:
- You will also have to change the mortgage and if you have a very good fixed rate currently then that will prove expensive.
- There will be stamp duty (SDLT) to pay. Ouch!
- There will be capital gains tax (CGT) to pay. Double ouch!!
Now you may have problems getting round the first one, although if you bought property AFTER the 2008 crash then you may benefit from a review (this could apply anyway). However, the second two are manageable.
IF (and it might be a big if) you run a portfolio as a business then you can get incorporation relief and avoid the capital gains tax charge; and if you run the business as a partnership then you can also avoid the stamp duty (in certain circumstances).
Note that joint ownership isn’t the same as a partnership. (I know, I know, but HMRC are like that).
Also you will have to take into account getting the money out of the business which is going to be more expensive with the new tax on dividends. All in all it might not be worth the bother unless you have a large number of properties, but every case is different.
This does require careful planning and advice, but as the savings are potentially high (and the costs of getting it wrong even higher) it’s not something you should try to do without talking to the right person. Ask an accountant who specializes but be prepared to pay for the advice; it’s a complicated area and there is a lot at stake. A full incorporation will run to a few thousand pounds, but the annual savings on a relatively small 10 property portfolio could pay for that within less than a year. And finding out HMRC wants perhaps £60,000 SDLT and CGT on that same portfolio will really make a person realize the difference between cost and value.
Have a great week and lets hope the sun shines this weekend (that’s one thing at least that IS tax free)
Paul