Chartered Accountants and Professional Business Advisers

« More stories from Shipshape July 2017

All change for buy-to-let landlords

The tax treatment of finance costs for individuals letting residential property changed on 6 April 2017. For 2017/18 income tax relief on 25% of costs will be at a maximum of 20% instead of the landlord’s marginal rate. The restriction rises to 50% of costs in 2018/19, 75% in 2019/20 and 100% of the interest cost after that.

These changes have led many people to consider the possible merits of operating through a limited company as there is currently no restriction in the tax relief enjoyed by a company. Furthermore, shareholders can claim tax relief at their marginal rate on a loan raised to invest in such a close company, subject to certain conditions.

Incorporation of an existing letting business was covered in the Spring 2017 edition of Shipshape. Since then there has been a change in the mortgage market, with many lenders looking more favourably on corporate borrowers. One major difference between investing directly in residential property compared to through a company is the indexation allowance in calculating the chargeable gain within a company. This makes comparison difficult.

One issue that can arise from operating through a company is the annual tax on enveloped dwellings (ATED), if the ‘taxable value’ of any single dwelling is over £500,000. Provided that tenants are unconnected to the controlling shareholder(s), ATED should be no more than an administrative nuisance, not a bill to pay. But exemptions have to be claimed.

Specific advice should be obtained before taking action, or refraining from taking action, in relation to the above. If you would like advice or further information, please speak to your usual Shipleys contact.