What is it?
Clause 24 of Finance Act 2015 will stop private landlords from using 100% of their mortgage interest to offset against their tax bill. It will begin to take effect from April 2017 through a staged process with the full effect coming into place by 2020.
How will it affect you?
As an example; if you have a Rent Roll of £125,000 and Mortgage Costs of £50,000 your effective rate of tax will be 52%. That is a tax increase of 173%. In more general terms this means:
- A possible tax bill even if a private property business makes a loss
- A tax on revenue NOT profit
- A possible tax bill equal to 100% of profit
- An unplanned move from the Basic Rate to Higher Rate Tax Band
- A sustainable business becoming an unsustainable business.
What should you do?
The “informed” view is that you should transfer to a Limited Company because you will can to continue to offset mortgage interest and suffer only 20% Corporation Tax. There are significant problems with a Limited Company:
- The transfer will be treated as a disposal for Capital Gains Tax. You will pay 18% or 28% of the gain you have made. The gain will be calculated at Market Value. On a gain on a property of £100,000 at 28% you will pay £28,000.
- You will pay Stamp Duty Land Tax on the transfer. On an average value of £600,625 for a property based in London this will result in a cost cost of £38,050 per property.
- You will pay Annual Tax of Enveloped Dwellings (ATED). Recent rules demand that property companies pay £3,500 per annum ATED on a property valued at £500,000 and over.
- You will not qualify for Business Property Relief for Inheritance Tax. Gifts of assets held in a property company will be subject to Inheritance Tax of 40%. A property with equity of £100,000 will cost £40,000 in IHT to pass on.
Can this really be your only option?
No, you can restructure your property portfolio using a Property Management Company Trust.
The Trust is a structure used by our property investors and owners who wish to protect the income potential of a portfolio of assets.
Using a strategy proven and implemented successfully for over 20 years the assets can be moved – under statutory protection – into a protected trust environment. It has the following features:
- Assets transferred using statutory reliefs.
- Involves no “tax avoidance”.
- Profits generated from protected assets are tax exempt.
- Does not require a DOTAS reference.
- Initial transfer is free of Capital Gain Tax under statutory reliefs (Section 162 of the Taxation of Chargeable Gains Act 1992).
- No Stamp Duty Land Tax is applicable as there is no transfer of title.
- Lenders retain 1st Charge on the property.
- The portfolio is managed by your property management company (a UK fiduciary company) with full investment powers.
- Net profits from rent roll pass to the UK fiduciary.
As you can see there is an alternative out there and we already deal with a number of BTL investors and property develops. Why not contact us on 0333 444 0325 for more information on how we can help you ensure you make the maximum rental profit – or email us at email@example.com.