After HMRC’s raid on buy-to-let properties, it’s no wonder you may be asking yourself what you should do. There are two major changes in regards to tax reliefs on buy-to-lets which we will examine below:
- Letting a fully furnished property
Currently, a deduction equal to 10% of the rent is given to if you let a property fully furnished. From April 2016, the 10% deduction on furnished lets will no longer exist. Instead, a tax relief will be available for any costs incurred from furniture replacement will be available instead, which will more likely than not increase the tax payable on furnished lettings.
- Interest on mortgages & loans
Currently, any interest incurred on mortgages & loans to either buy or perform maintenance and improvements on a property is fully deductible. However, this will no longer be the case in the next few years. This change is quite possibly going to do the most damage, wherein property owners will no longer have fully deductible interest. You will now only get relief at the basic tax rate. This does not affect companies that own property, as it only applies to income tax.
Your Accounting firm advice: What is the most efficient way to hold your property following the latest budget changes?
Now that we’ve examined the two drastic changes on buy-to-lets, we will explore what you can do from here on out. Although your situation may vary, we can certainly discuss the most efficient way to hold your property. This can be simply explained by weighing up the advantages of buying property as a limited company, rather than as an individual. In light of the two upcoming tax reliefs on buy-to-lets, it’s safe to say that the favour lies with limited company ownerships.
As previously stated, if you do own properties through a limited company, the change on deductibles for property loans does not even apply to you. This means if you buy property through a limited company, the taxation on your profits is going to be significantly lower than if you were to purchase a buy to let property in your own name. You will still have to consider the impact of other factors, such as Capital Gains Tax and Dividend Tax. However, this is probably your best bet because owning a buy-to-let in your own name will give you less favourable options, leaving you to find alternative finance to repay the loan or selling the property altogether.
When you own property through a limited company, any rental income would be considered business income, which could benefit you when it comes to tax relief from loan interest. However, it’s important to note that if you are going to use a company for ownership of your rental property, it’s much more beneficial if you have a portfolio of properties, rather than just one. Additionally, setting up a company comes with many corporation, legal, and administrative fees, so it’s important to weigh these costs and the amount of time it may take.
As always, your accounting firm will be the first person you should speak with to weigh up your options. Although the changes are not coming into force immediately, it can take time to get the right structures in place, and it is crucial that you begin planning for the future now, so that you don’t end up losing out on your investments as a result of these budget changes.
Contact Morgan Reach Chartered Accountants to set up a consultation and discuss your options:
London- 0207 316 3024
Birmingham- 0121 236 0777