Tax

The Government’s tax changes are ready to bite

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Tax

Announced in 2015, the Government’s changes to Mortgage Interest Relief start to bite from this April. If you recall our blog from last summer – read it here – you’ll know that these changes will catch out any landlord who has a mortgage on the property they let and who pays tax at the higher 40 per cent rate.

There is a way around it. By incorporating your property rental business, you’ll be paying corporation tax on your profit after you’ve deducted all the mortgage interest – and current corporation tax rates stand at 20 per cent.

Should you do it then? Well, recent figures from the National Landlords Association suggest that more and more landlords are opting for limited-company status.  In January 2016, 1 per cent of Landlords had formed a limited company over the previous 12 months. In January 2017, the figure has risen to 6 per cent. It’s still a small proportion, but it’s a huge increase.

If you decide to follow suit, you’ll be faced with several decisions and a number of costs. You may have to pay fees to set-up a suitable commercial loan to replace your existing mortgage deal. You’ll be liable for capital gains tax, stamp duty and legal costs relating to the sale of your property to the new company. There could be financial penalties for early redemption of your mortgage.  Add to that the admin and accounting costs of running a limited company, and the tax savings might not be quite so attractive.

It’s one of those situations when the answer depends on the scale of your portfolio, your income levels and the proportion of mortgage debt to equity.  It’s not one-size fits all.

To make matters more confusing still, we’re in an evolving situation. The Government isn’t likely to sit back quietly while large numbers of landlords incorporate their businesses to save on tax. It could be that a review is on the cards. Take advice, by all means, but keep your eyes and ears open for hints on changes in the policy. And, of course, don’t forget to tune in to the Spring Budget which takes place on March 8.

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