Increased Tax for Landlords

Increased tax for landlords will start to hit home this year now that, from 6th April 2017 -to April 2020, HMRC are progressively reducing the deduction for finance costs to the point that you will only be able to deduct 20% of the cost from their personal tax liability. Higher and additional rate tax payers who let residential properties will be hit by the changes once they file this year’s tax return next year. Landlords who have high mortgage costs relative to their rental income may well struggle as this change comes on top of a number of other recent changes that seem designed to discourage the private buy to let market.
The obvious answer is to operate your property businesses through a limited company as the interest rate restrictions do not apply to companies. Well, at least not at the moment, and that is one of the problems when weighing up the gains and losses. No-one really knows how long the current situation will apply. And, while the use of a company increases the amount of interest relief that can be claimed, it also adds to your accounting costs and potentially means higher mortgage rates because you will need a commercial mortgage. So saving tax for landlords is not the only issue here.
If you have existing properties then moving them into a company will crystallise a capital gains tax charge and means a stamp duty payment as well so some careful thought is necessary. And once a property is within a company then if you sell and want to take the money out of the company you will not only lose your personal CGT allowance but also have to pay personal income tax as well as corporation tax on the sale. The calculations can be complex but, in general, we think that a company is the vehicle for longer-term property holding and not to be entered into if you think you may need to sell the property fairly soon.
So do ask for advice and be aware of the potential costs.