Property investment has always been a strong winner over the longer-term with many people happy to see their money invested in bricks and mortar. The ability to put in a deposit and get capital appreciation over the longer-term on the whole property asset, has allowed great wealth accumulation for many investors over the years.
It is worth noting that the changes only currently affect residential property held in your personal name. If you hold your property in a limited company, then there are no changes to the current tax regime. You can also continue to offset the mortgage interest on commercial properties and furnished holiday lets.
Please see below some examples of the old regime vs the new regime.
Example 1: Basic Rate tax payer
Example 3 – Higher Rate
Please see below some key points that highlight the fundamental changes that will affect landlords.
- You will now get a tax credit of 20% on all finance costs including mortgage interest associated with the residential property you let out.
- As the finance costs are not treated as an expense, it can have the disadvantage of dramatically increasing your income and pushing you into higher tax brackets. There is also a risk you could lose, or have your personal allowance reduced if your total income exceeds £100,000.
- If, after you factor in your property income, you are still a basic rate taxpayer there are no changes in the tax liability under the new regime.
- As soon as you start paying higher rate tax you have a higher tax liability than before the changes were implemented.
- Although the tax implications will be higher, this does not rule out property as a sound longer-term investment. Let’s assume you owned two properties worth £200,000 creating a rental income of £20,000 per year after allowable expenses. As illustrated above, this would incur an additional £2,000 tax liability in the new regime if you had a salary of £40,000. It is worth noting however, you are still making £2000 profit after a year after tax. You also need to factor in the potential capital appreciation, at 5% this would equate to £20,000. There would however, potentially be a capital gains tax liability if you ever sold the property.
Incorporating a company to buy property (SPV)
Due to the new way individuals are taxed, purchasing property within a company is now a key consideration. The Lenders refer to these companies as special purchase vehicles (SPVs). Please see below some advantages and disadvantages for your reference.
- You will pay corporation tax on profits and capital gains.
- You can still fully offset finance costs including residential mortgage interest as an expense.
- You can control when and how you take the rental income generated. This means you can defer drawing income until your income reduces, for example, in retirement.
- You can add additional shareholders such as your spouse and children to get the income out of the company in the most tax efficient manner.
- You can succession plan for future generations in terms of passing on shares in the company over time to allow you to undertake Estate planning in a tax efficient way.
- You can often leverage more against the property income if you plan to raise additional funds for further investment and growth.
- If you decided to sell the property held within a company in the future, the profit achieved would be subject to Corporation Tax.
- You will still pay personal tax when you draw funds from the company at your marginal rate.
- You will incur additional accountancy fees and you will need to submit a company’s house return annually.
- You would lose your ability to offset the personal £12,000 capital gains allowance on the sale of the property.
Please be aware that if you are thinking of transferring property that you own personally onto a limited company then you should seek advice on this first. It’s not as straight forward as simply transferring the property into a limited company and could have Capital gains tax and stamp duty implications.
The new regime that is affecting mortgage interest also affects other finance costs which includes costs such as fees incurred when taking out or repaying mortgages or loans used to fund the property, valuation fees, legal fees for drafting loan agreements etc.