With effect from April 2017, the Government will begin to phase-in the loss of mortgage interest relief. Here, Nick Attwell explains what this means for buyers, both individual and companies.
Initially in the year 2017-2018, 75% of finance costs “can be offset” against income reducing by 2021 to nil. Instead, a buy-to-let investor will benefit from a tax credit equal to 20% of the interest cost. The effect of the changes is that higher and additional rate tax payers will pay much more tax and in some cases, pay tax where there is no profit. Landlords who are structured as companies are exempt and will continue to pay corporation tax on their profits.
Historically a corporate wrapper for buy-to-let was unattractive because the loans to value were much more generous for personal landlord buy-to-let borrowing and the rates and costs much lower. However, this too has been changing. The changes in the mortgage rules for personal buy-to-let this year has meant it is far more difficult to achieve high loan to values and costs have been increasing.
Corporate lending has become more commonplace. These changes have meant that at Attwells we are seeing more and more buy-to-let investing within the corporate wrapper. However, incorporation is not for everyone and needs careful thought. If you are moving existing properties into a corporate wrapper there could be Capital Gains Tax (CGT) and Stamp Duty Land Tax (SDLT) implications. Remember corporate entities pay SDLT at the higher rate.
Having a corporate vehicle also means there are ongoing corporate responsibilities and you may need to employ an accountant. You also need specialist accountancy advice as to your strategy. If you are looking to reinvest profits and grow your portfolio then the tax advantages could be significant. Otherwise they may not be.
You should also consider a shareholders agreement if you are buying with others.
For more guidance on this matter, please contact Nick Attwell on 01473 229242.