Warning for Buy-to-let Investors – UK Tax Changes Proposed
In the UK’s recent Summer Budget a tax crackdown on buy-to-let investments has been announced. This type of investment property has been popular among both UK residents and non UK residents, due to capital appreciation and the ability to reduce rental profits for tax purposes by deducting mortgage interest in calculating taxable profits.
However, the recently announced changes will significantly reduce this tax relief for higher or top rate taxpayers, meaning taxable profits will now be much higher than they have been in the past.
Previously, the tax relief for a higher rate taxpayer on their mortgage interest deduction has been at their marginal rate, i.e. 40% or 45%. Following the changes, tax relief will be reduced from 2017 and fully limited to the basic rate of tax at 20% by 2020. Consequently landlords will no longer be able to deduct the cost of their mortgage interest from their rental income when calculating their taxable profit.
In addition to the above, landlords will now be able to deduct the full cost of replacing furnishing, with the wear and tear allowance of 10% being scrapped for furnished properties. This will further contribute to higher taxable profits for buy-to-let-investors.
Personal ownership is not the only option available to investors. One alternative is to own any future buy-to-let properties through other vehicles, such as a company. While corporate ownership does entail further tax paid upon dividends and the potential for double taxation, with gains on assets triggering a tax charge within the company, the new tax changes make this a more attractive option.
The current rate of tax paid by companies is 20%, which is set to decrease to 19% in 2017 and reach 18% by 2020. The company is also able to receive a deduction for its finance costs in computing company profits, resulting in a lower taxable profit than can be achieved through personal ownership.
However it should be noted that transferring personally owned properties into a company will incur some tax consequences, such as capital gains tax on the asset value. Whether corporate ownership is the right choice will depend on individual circumstances as well as your long term investment plans.
The new tax changes are complex in nature and will impact investors differently depending on a number of individual circumstances.
Should you have any questions in relation to these changes please contact your ESV Engagement Partner on 9283 1666.