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Business Tax  •  Personal tax  •  Property  •  Tax Planning  •  Tax Relief

Transferring BTL property to a company without re-mortgaging to a commercial interest rate?

By RJP LLP on 15 May, 2017

Can landlords really have their cake and eat it?

The ability to build a residential rental property portfolio, whilst offsetting borrowing costs against rental income, has made buy to let a very popular investment. This has been especially true for higher rate taxpayers, who have been able to claim tax relief at their marginal rates. However, one of the most troublesome aspects of residential buy to let investment today is the gradual removal of mortgage interest tax relief. Now, starting from April 2017, the level of tax relief available is slowly being reduced and by the 2020-2021 tax year, only basic the rate of tax relief will be available for borrowing costs for all taxpayers.

Tax relief due on borrowings is to be reduced as follows:

  • 2017 – 2018: Deduction from property income is restricted to 75% of finance costs, with the remaining 25% being available as a basic rate tax reduction;
  • 2018 – 2019: 50% finance costs deduction and 50% given as a basic rate tax reduction;
  • 2019 – 2020: 25% finance costs deduction and 75% given as a basic rate tax reduction;
  • 2020 – 2021: all finance costs incurred by a residential landlord will be given as a basic rate tax reduction.

This reduction, together with the stamp duty land tax (SDLT) surcharges, removal of the wear and tear allowance, and higher rates of capital gains tax applying to disposals of residential property investments, has created a surge among taxpayers looking for ways to mitigate the tax increases.

Investing in property through a limited company is one obvious alternative to personal investment, but this needs careful evaluation. One big issue is that commercial interest rates, which are charged on mortgages involving company owned property, can be significantly higher than the record low headline rates currently available to individuals on the high street.

In an attempt to avoid this issue, a solution has been suggested by a law firm in the form of a ‘Beneficial Interest Company Trust’. This is a suggested arrangement which enables an individual to move property into a limited company whilst retaining legal title. It is therefore suggested that it is possible to keep the mortgage in the name of the individual, whilst ensuring the limited company receives the rental income.

This suggestion was originally reported in the Telegraph and has created quite a lot of debate within the tax profession with suggestions of potential mortgage fraud, mis-match of income and mortgage interest relief, and likely attacks from HMRC on the basis that such a move is tax motivated rather than commercially motivated, therefore is subject to anti-avoidance legislation.

Whether this suggestion proves to be acceptable to mortgage companies and to HMRC or whether it does not, as is more likely to be the case, consideration of the transfer of residential property to a limited company should also include a review of the following issues:

  1. Stamp duty land tax (SDLT) applies to the transfer of residential property from an individual to a limited company. In some cases, tax planning can reduce or mitigate this, but it is a complex planning area and is not suitable for all cases;
  1. Capital gains tax (CGT) will apply to the transfer if the value of the property has increased since it was purchased. Again, tax planning can apply to reduce the tax in certain cases. If relief is not available, the rate of CGT applying is 28%;
  1. Where residential property is owned by a company, the annual tax on enveloped dwellings (ATED) needs to be considered. Relief may be available from this tax if the property is rented to unconnected parties, however there is still likely to be a reporting issue; We have written about ATED recently https://www.rjp.co.uk/2017/04/25/important-ated-deadlines-rental-property-owners/

If it is not feasible to transfer an existing property portfolio due to the costs involved, an alternative approach may be to continue with personal ownership of existing property investments and consider the pros and cons of investing through a limited company for any new acquisitions. The downside of this approach is likely to be the more costly mortgage rates and the fact that there are no guarantees that the tax position will not change in the future.

Many of RJP’s clients have property investments and we have helped many taxpayers with very tailored tax advice to mitigate their property tax issues. If you would like to get in touch with questions, please email partners@rjp.co.uk.

 

 

 

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