What is it?
Clause 24 of Finance Act 2015 will stop private landlords from using 100% of their mortgage interest to offset against their tax bill. It will begin to take effect from April 2017 through a staged process with the full effect coming into place by 2020.
How will it affect you?
As an example; if you have a Rent Roll of £125,000 and Mortgage Costs of £50,000 your effective rate of tax will be 52%. That is a tax increase of 173%. In more general terms this means:
- A possible tax bill even if a private property business makes a loss
- A tax on revenue NOT profit
- A possible tax bill equal to 100% of profit
- An unplanned move from the Basic Rate to Higher Rate Tax Band
- A sustainable business becoming an unsustainable business.
What should you do?
The “informed” view is that you should transfer to a Limited Company because you will can to continue to offset mortgage interest and suffer only 20% Corporation Tax. There are significant problems with a Limited Company:
- The transfer will be treated as a disposal for Capital Gains Tax. You will pay 18% or 28% of the gain you have made. The gain will be calculated at Market Value. On a gain on a property of £100,000 at 28% you will pay £28,000.
- You will pay Stamp Duty Land Tax on the transfer. On an average value of £600,625 for a property based in London this will result in a cost cost of £38,050 per property.
- You will pay Annual Tax of Enveloped Dwellings (ATED). Recent rules demand that property companies pay £3,500 per annum ATED on a property valued at £500,000 and over.
- You will not qualify for Business Property Relief for Inheritance Tax. Gifts of assets held in a property company will be subject to Inheritance Tax of 40%. A property with equity of £100,000 will cost £40,000 in IHT to pass on.
Can this really be your only option?
No, you can restructure your property portfolio using a Property Management Company Trust.
The Trust is a structure used by our property investors and owners who wish to protect the income potential of a portfolio of assets.
Using a strategy proven and implemented successfully for over 20 years the assets can be moved – under statutory protection – into a protected trust environment. It has the following features:
- Assets transferred using statutory reliefs.
- Involves no “tax avoidance”.
- Profits generated from protected assets are tax exempt.
- Does not require a DOTAS reference.
- Initial transfer is free of Capital Gain Tax under statutory reliefs (Section 162 of the Taxation of Chargeable Gains Act 1992).
- No Stamp Duty Land Tax is applicable as there is no transfer of title.
- Lenders retain 1st Charge on the property.
- The portfolio is managed by your property management company (a UK fiduciary company) with full investment powers.
- Net profits from rent roll pass to the UK fiduciary.