George Osborne’s July 2015 budget witnessed what many now see as a step change in how larger landlords will be forced to pay significantly more income tax from 2021. The material difference is in how finance costs will be treated with just 20% of interest payments being an allowable expense from this point. Whilst the change will be phased in from the 2018 tax year, this will undoutably mean some pain for a good number of landlords and Nottingham letting agents that currently hold property in their personal name.
Letting agents in Nottingham, Slater & Brandley have put together the following most important points so as to help landlords start to consider the impact the new regime will have on them.
Consider this – the good news is that if you are a Basic Rate taxpayer with a small property portfolio of say two or three properties plus a full time job, there will be no material difference. With an expected Personal Tax allowance of £12,500 plus the Basic Rate tax band set at £37,500 landlords can earn a maximum £50,000 before becoming a 40% Higher Rate taxpayer. Therefore with no exposure to a 40% tax bill hence the 20% tax relief on interest allows full tax relief for finance costs.
However, if as a landlord you currently sit below the 40% tax band with £50,000 income or less, with finance costs over and above this sum, by adding back the full finance charges this wish push many landlords into the 40% tax band that have previously been able to offset all financing costs. With the new finance income added tax relief will only be allowed at 20% of the total finance costs. The net result is a far greater tax bill for many.
So can anything be done to help mitigate the new tax liability?
In short – yes. Tax advisers are suggesting a number of options including selling off properties with higher mortgage costs. Other ideas include creating a property management company to allow the deduction of management fees. Landlords can effectively become letting agents in Nottingham in their own right. Alternatively a landlord could consider setting up a lease arrangement allowing properties to be leased to a property management company and then sublet, subject to the individual mortgage lender terms and conditions. Another idea would be transfer properties to Basic Rate taxpayers such as spouses effectively meaning no change to tax liability. You could consider spending more money than usual on property managing repairs. And finally, landlords may now have that compelling further reason for putting properties within a Limited Company structure as the new rules can then be effectively side-stepped.
We hope you have found this article to be thought provoking and that as a landlord it helps to kick start your tax planning for the future getting the best out of property management opportunities.