As tax pressures on landlords continue to increase many are looking for ways to reduce their liability. We are not accountants so we urge all landlords (or prospective landlords), whatever their situation to talk to their accountant – this article offers general information only.
Firstly, a reminder that the biggest tax pressures on landlords arise from the phased reduction of mortgage interest relief on residential properties introduced by George Osborne under Section 24 which is now live.
• 2017/18 – 75% allowed as a tax deduction; 25% subject to basic rate reduction
• 2018/19 – 50% allowed as a tax deduction; 50% subject to basic rate reduction
• 2019/20 – 25% allowed as a tax deduction; 75% subject to basic rate reduction
• 2020/21 – 0% allowed as a tax deduction; 100% subject to basic rate reduction
If you live with a spouse or civil partner and have income from property you jointly own, you will normally be taxed on an even split of the income between you.
Use Form 17 if you want to change the split of income to your actual share of ownership
You’ll also need to provide evidence that your beneficial interests in the property are unequal, for example a declaration or deed.
This is useful if either you or your spouse/civil partner are taxed at a lower rate.
Profit Sharing Agreement
In some respects, this is like the Form 17 route above, – Landlords who own properties jointly, who are not married, may be able to benefit from a profit sharing agreement as a way of allocating a greater share of property profits to the lower earner.
Incorporation and/or using a company for future purchases
This is a popular consideration for some landlords, given mortgage interest and finance costs may still be claimed for properties held in a limited company.
Further benefits include a lower rate of tax compared to the higher personal tax rate, indexation allowance, potentially lower rates on selling properties, amongst others.
There is a flip side, personal allowances and annual exemptions in personal ownership would be lost, and whilst the tax rates are lower, extracting money from the company can attract further tax implications, particularly by the recent tax changes in dividends.
In addition, for those owning property personally, there can be benefits when selling a property that you have lived in, whereas there can be serious consequences if you live in a company owned property.
If you are looking at transferring existing property to a company, unless you can benefit from incorporation relief, then you may be facing an immediate capital gain on sale, given an individual and a company are two separate legal entities.
Because there is a lot to weigh up here our strong recommendation is that you take financial advice before making any big decisions as to whether incorporation is for you.
Additional Voluntary Contributions –
these can be a good mechanism to delay the point at which you start paying the higher rate of tax. For a lot of landlords, your AVC pension contribution can extend the basic rate tax band, and therefore for example, expose a greater amount of your income to the 20% rate of tax
Gift Aid Donations –
For those who make charitable donations under the Gift Aid scheme, these have a similar mechanism to the above, and can again, delay the point at which you start paying a higher rate of tax.
Pay Down Mortgages
Because the Section 24 changes affect those with mortgages many will be tempted to pay down mortgages but a careful review of the net financial ramification before and after is recommended as landlords could see a greater tax bill as they would not receive the finance cost “reducer” in their tax calculation.
Consider the net position i.e. what would be left over in your bank account, explore what can be done with the excess money you have from not having to pay the mortgage any more, and explore how best this money can be invested.
This is one suggestion which may help mitigate the effects of Section 24, although again, care must be taken to review a before and after scenario. Whilst there would be an increase in rent received, there would also then be a greater taxable profit to factor in, so a case therefore of weighing everything up.
Exploring different property types
As the Section 24 changes affect residential properties, it may be worth exploring commercial property and/or furnished holiday lets. For landlords with a portfolio of properties, investigate whether one of the portfolio could be suitably converted into a Furnished Holiday Let. Beware though that if it ceased to continue to meet the criteria it would revert to a standard residential BTL
Sell poor performing property
If one of your properties within the portfolio is performing poorly you could sell it and use any residual equity to reduce the LTV on your existing stock.
Because doing nothing about these tax pressures on landlords is risky we recommend that all landlords continuously reassess their individual circumstances, understand their position and the impact on their finances and then, in conjunction with their accountants, structure a plan and stay informed.
Please get in touch to discuss your requirements, we work closely with many investors and their financial advisers and can help you shape a sensible financial plan to mitigate your tax liability.
Contact us at Source Investments