Tax for Landlords - Nova

In April 2017, landlords were no longer able to deduct all of their finance costs from their property income to arrive at their profits. Instead, they would have received a basic rate reduction from their income tax liability for their finance costs.

What does this mean for profit?
It’s difficult to say how much more tax would be due as the reduction in mortgage interest and wear and tear allowances, but it will certainly is a hit for higher-rate tax payers. If you don’t have a mortgage or if you’re a lower rate payer, you will not be affected at all.

Options for a higher rate tax payer?
In practical terms, landlords now have four options:

1. Sell up
The first option is to sell up and either invest your money elsewhere, save it or spend it. You may have to take the Capital Gains Tax hit and mortgage penalties (if there are any), but if you are thinking of retiring anyway this could be an option.
This isn’t something that most landlords will want to do however, as though the market is suffering a post-Brexit slump, property is still a very good bet..
2. Make a positive decision to do nothing
Option two is to do nothing. This may be a default decision for the majority as long as you have explored the different options available to you and are aware of how you’ll be affected by the tax changes.
This option will most likely mean that your tax bill is increased and your disposable income is decreased, but it will not severely affect those with only one or two properties.
3. Incorporate
The only way to get over “Section 24”*: sell your personally held investment property(ies) to a limited company which you own.
Trusts are also not an effective solution, and their use for property is far more limited that it used to be. They are over complex, especially when it comes to mortgage flexibility and inheritance tax mitigation, and generally not the best option for landlords.

*Section 24 means that landlords can now only claim basic rate tax relief on financing, which in most cases will mean a mortgage.

Before the changes, if you were a higher rate taxpayer, you could claim higher rate tax relief on mortgage interest payments. That has changed so that now you can only claim basic rate relief.

So, if previously, you were only claiming basic rate relief before, nothing has changed for you. But for most property investors who are in the higher rate tax bracket, there is now, effectively, a 20% reduction on what they can claim.

What’s S162 Incorporation Relief?
Section 162 incorporation is available to help negate the requirement to pay Capital Gains Tax or Stamp Duty when transferring existing personally held investment properties into a limited company. You can only claim S162 if you’re working in the business, or dealing with tenants yourself.

Taxes that we and our clients face:
1. Income tax
2. National insurance
3. Corporation tax
4. Capital Gains Tax
5. VAT
6. Inheritance Tax
7. Stamp Duty Land tax

Structures that are available for Landlords:

Sole Trader/Partnership
– Properties are owned in your name
– Mortgages are in your name
– Profit or losses are in your name
– Capital gains are in your name
– Taxes are your responsibility and taxed at your marginal rate – maximum of 45%
– You are taxed on profit NOT what is drawn out to live on
– Inside your estate for inheritance tax

Limited Company
– Properties owned by the limited company
– Mortgages in the name of Limited company
– Higher rates interet -debenture over company – personal guarantee
– Rents received in the company name- expenses paid by the company
– Capital gains are made in the company
– Tax is responsibility of Company – 19% Tax rate
– The company is taxed on profit – you are taxed on what you draw out
– Inside your estte for inheritance tax

Limited Liability Partnership
– Properties are owned in the LLP name
– Mortgages are in LLP
– Profits or losses are in LLP
– Capital Gains are in LLP
– Taxes are in the LLP, but taxed at marginal rate – maximum 45%
– You are taxed on profit NOT what is drawn out to live on
-Can be outside of your estate for inheritance Tax

Mixed of the above/ Hybrid Structure
– Takes the advantages of sole trader/partnership
– Takes advantage of limited company
– Join the 2, structures together
– You are taxed on profits Not what you draw out
– Maximum tax rate 20%
– Capital Gains – Maximum rate is 19%
– Can be outside of your estate for inheritance tax

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