Mortgage Interest Relief Restrictions – are you ready?
By Kevin McDaid, Mar 7 2017 01:09PM
In a real life case study ‘John’ http://www.propertytaxadvisers.co.uk/case-studies/4591698202, I highlighted how a full time landlord with a reasonably significant residential property portfolio of BTLs, would see his net income (after tax) fall from £91,668 in the 2014/15 tax year to just £19,261 by 2020/21 even though his income and expenditure would remain the same. This equates to a drop in income of almost £72,500.
Imagine how bad things could get if interest rates rise from the historically low levels they are currently at!
The reason for the huge drop in income is because of changes in the taxation of BTLs held by non corporate bodies (i.e. individuals, partnerships, LLPs).
05/04/2016 saw the end of the 10% wear and tear allowance and 06/04/17 will see the phased introduction of the restriction of loan interest relief. This will be complete by 06/04/2020, at which point non corporate landlords will not receive any tax relief for loan interest on residential lets. Instead, they will obtain a 20% tax credit.
For a 40% taxpayer this means that tax relief on mortgage interest will halve by 2020. But the new rules can also turn taxpayers who are currently only liable to 20% income tax into 40% taxpayers with adverse knock on implications for tax credits, child benefit &/or student loans. The first case study ‘Michelle’ at http://www.propertytaxadvisers.co.uk/case-studies/4591698202 looks at this.
No wonder then that most landlords will have recently considered changing their operating status to that of a limited company.
You should note that incorporation is NOT right for everybody. There may be far easier solutions that will be appropriate for you. In some cases, doing nothing might even be the best thing to do.
But whatever route is chosen you can be sure of the same sense of satisfaction that JC from Leeds felt following my advice leading to his incorporation in March 2016. His testimonial at the side of this blog indicates ‘I know exactly where my business is going, how much money I can personally extract from the company & how much should be left in to help pay off existing mortgages or to expand the business’.
By the time the loan interest relief restrictions are fully implemented in 2020, John will be over £54,000 per annum better off as a result of my advice.
However, to achieve such significant savings requires a thorough understanding of the relevant legislation, case law and HMRC guidance.
• Will you qualify as a business?
• Should you operate as an LLP?
• Could a deed of trust help me to avoid refinancing costs?
With substantial amounts of Stamp Duty Land Tax (SDLT) and Capital Gains Tax (CGT), mortgage refinancing costs and additional accountancy fees likely to arise as a result of incorporation, it is a decision that should not be taken without access to the full implications.
In certain circumstances SDLT, CGT and the refinancing costs can be taken out of the equation.
Sorry, I don’t think there is anything that can be done about the increased accountancy costs. To be fair, operating via the medium of a company has far more compliance obligations than an unincorporated business – hence, the higher fees.
With the new rules just around the corner, now is the time to be contacting us for your own bespoke plan. One thing is for sure: You will be in the minority if you are a landlord who does nothing and ends up not paying more tax than they have to.
What our clients said about us:
I have a portfolio of over 50 residential properties throughout the North of England.
I first came across Kevin in 2010 when he was performing capital allowances valuations in respect of houses of multiple occupation (HMO). At that point, not many accountants that I spoke to, had much of a clue about the ability to claim the allowances whilst many of those organisations who were in the know, were keen to do the valuations for a hefty fee but then really did not instil me with any confidence about the tax implications.
Kevin was different; we had an initial chat over the phone, there was no big sell and no hefty fee. Because he has a tax and surveying background, not only was he able to undertake the valuations he was able to liaise with my accountant to fully explain the tax implications and talk him through the reporting procedure.
There is no question that the tax savings I made hugely outweighed his fees.
Fast forward 5 years and there is no surprise that, once again, he seems to have a far greater understanding of the latest tax changes than the accountants of other landlords that I regularly speak with.
He has kept me fully updated on the tax implications of the loss of wear and tear and the changes in the allowability of loan interest. He has provided me with an in depth report showing how much post tax income I would have from the present day right through until 20/21 when the restriction is fully in force. It did not paint a pretty picture. In fact, I would go so far as to say, that I would almost certainly no longer be able to continue to operate as a property investor by 20/21 in a sole trader capacity. Consequently, as of 01/04/16, I am now operating as a limited company, Kevin guiding me and my accountant through the tricky incorporation maze and explaining the best profit extraction method going forward.
I would point out that we had been discussing the SDLT implications of incorporation on the run up to the Budget on 16/03/16. With over 50 properties this was going to be a hefty charge for me. We had anticipated there would be a relief for the transfer of more than 15 properties into company ownership. When it was announced in the Budget that this would not apply, Kevin contacted me on Budget day whilst I was in South America to break the news and to push for the transfer to take place by 31/03/16 in order to save an extra 3% SDLT, which I duly did.
Once again, big tax savings for reasonable costs but, most importantly to me, I know exactly where my business is going, how much money I can personally extract from the company & how much should be left in to help pay off existing mortgages or to expand the business.
It really is a no brainer to work with Kevin whether you are a large or small property investor.
We first used the tax services of Kevin almost 10 years ago when he was working for a local firm of chartered accountants. Having received an excellent service from him for a number of years (including expanding from a partnership to a limited company) we were delighted to hear that Kevin had set up on his own and had no hesitation in signing up as a client in 2012. He continues to offer a very personable and cost effective service. We would absolutely recommend him to any other small company like ours.
In addition to our company, we have a small residential property portfolio and were contemplating disposing of one of the properties in 2014/15. Had we not consulted with Kevin prior to the sale, we would have been facing an unwelcome Capital Gains Tax Liability. However, by transferring the property from sole into joint ownership we were able to benefit from a second CGT exemption which saved us almost £2,000’.
Mrs S (Company Director, Bingley)
I first met with Kevin in July 2015 because I was worried that I had been receiving rental income for 3 years but had not declared anything to the tax man. The reason I had not done so was because I had spent quite a bit doing it up when I first purchased it and, by my calculations, I had only just started to make a profit in the tax year ended 05/04/2015.
Kevin explained that not all the expenses would be allowable because some counted as improvements. He provided a fact sheet on ‘Revenue versus Capital’ indicating that those costs that counted as improvements would, ultimately, be available to set against any gains on disposal of the BTL. He also clarified the other expenses I was entitled to claim.
He calculated the net profit from letting. Even though no tax was payable he advised that the income still needed to be reported to HMRC which he duly did via a letter as, he said, the amounts involved were below the level for which a tax return was required. Apparently, this saved me penalties for failing to submit tax returns by the due date.
A tax return will be required for 2015/16 and I will be using Kevin to prepare this as, last year, he took away my concerns in sorting out my tax in a professional manner. He is not expensive and I feel comfortable dealing with him.
I would be happy to recommend him based on my experience.
BLOG INDEX - PLEASE SCROLL DOWN TO VIEW INDIVIDUAL ENTRIES.
How SDLT could change how rented property is owned by couples/civil partners.
CGT Reliefs on homes to be significantly restricted from 04/2020
Mortgage Interest Relief Restrictions - Are you ready?
Making Tax Digital (MTD) & the cash basis for landlords
Landlords lose legal challenge over BTL tax changes
When the sale of a property will be liable to Income Tax rather than CGT
CGT on BTL to be taxed as income - Don't worry, it is not going to happen
The Statutory Residence Test - Working full-time abroad
Replacement Furniture Relief.
How flexible are your pensions savings?