Section 24 of the Finance Act 2015 significantly altered the tax landscape for landlords. This legislation limits the tax relief that individuals can claim on property finance costs, potentially increasing tax burdens for landlords, even in non-profit scenarios. It’s crucial for landlords to understand these changes as they explore ways to navigate ongoing tax challenges, including the use of Limited Companies. In PropertyReporter today, Rebecca Wilkinson, Business Tax Partner & property specialist at Menzies LLP explained.
The Rise of Tax-Saving Schemes
In response to these tax changes, there’s been an uptick in tax-saving schemes, like the “Less Tax for Landlords” hybrid partnership scheme. These schemes promise lower tax bills, but caution is advised. Remember, if something sounds too good to be true, it often is.
Legal Implications and HMRC’s Stance
HM Revenue & Customs (HMRC) has clearly stated that tax avoidance schemes are illegal and can lead to severe penalties. Landlords should be wary of any restructuring strategy primarily aimed at tax avoidance.
Key Considerations for Restructuring
Commercial Rationale
Any restructuring should have a clear commercial benefit beyond just tax mitigation. For example, transferring a letting business to a limited company (incorporation) can limit liability and separate business risks from personal assets. However, this doesn’t always equate to tax savings and can incur other costs like Capital Gains Tax (CGT) and Stamp Duty Land Tax (SDLT).
Operating Your Portfolio
The operation of your portfolio is critical. To claim CGT relief, landlords must actively manage their business for at least 20 hours a week. SDLT relief has even stricter requirements, necessitating a partnership structure. These conditions are not always easily met, and failing to do so can result in significant tax liabilities.
Transitioning Mortgages
Incorporation necessitates notifying mortgage providers about the change in property ownership. This often leads to refinancing to a company mortgage, accompanied by early redemption charges and higher interest rates.
Due Diligence
Thorough advice is essential before proceeding with incorporation. While initial tax liabilities may be lower, ongoing costs like higher corporate interest rates and other company-associated expenses should be carefully considered.
Balancing Risk and Returns
Landlords must balance risk and returns in their portfolio. For some, selling might be the best option, while others might find expanding their portfolio beneficial. Incorporation could be a strategic move for reducing personal risk and increasing control, but it should not be pursued solely for tax reasons.
Every landlord’s situation is unique. It’s imperative to consult with a trusted tax professional for a tailored assessment. By understanding these key aspects, landlords can make more informed decisions about their property investments.