1. Buy to let property – Update
Sean Egan CTA FCA
Tax Partner
No responsibility for any person acting or refraining from action as a result of this presentation can be accepted by the author/ Hale & Company LLP

2. Overview Recap What’s new? Income Tax Stamp Duty Land Tax
Finance costs
Wear & tear allowance
Stamp Duty Land Tax
3% surcharge
Capital Gains Tax
8% surcharge
Calculating the tax credit for finance costs
Interest relief on capital withdrawn from business
Incorporation issues
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3. Restriction on Finance Costs
Finance costs includes mortgage interest, incidental finance costs, commissions etc.
Phased in from 2017/18 to 2020/21
Up to April 2017
Tax relief - up to 45%
From April 2017
Tax relief reduces to 20% over 4 years
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4. Restriction on Finance Costs
Full relief Basic rate relief
2016/ % n/a
2017/ % %
2018/ % 50%
2019/ % 75%
2020/ Nil %
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5. Restriction on Finance Costs
2016/ /21
Gross rents , ,200
Interest on mortgage -6,
Net rental profit 1, ,200
40% ,880
Less: 20% interest relief ,200
Net tax liability ,680
Profit/(loss) £ (£480)
Effective tax rate % %!
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6. It gets worse! Interest relief is the lower of 20% of:
The disallowed finance costs
The property profits
Your ‘adjusted total income’ (does not include dividends)
Can convert basic rate taxpayers into higher rate taxpayers
Can impact on child benefit/ personal allowance/ pensions etc.
Can affect the rate of Capital Gains Tax on capital gains
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7. Restriction on Finance Costs
Residential property ownership only
Not property dealing or developing
Not Furnished Holiday Accommodation
Does not affect company ownership of residential properties (but lots of other tax rules do!!)
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8. Restriction on Finance Costs – Our experiences
Clients are starting to appreciate the impact
Higher taxes
Less surplus to reinvest
Tax mitigation being considered
Income splitting
Incorporation
Sale of properties
Reducing gearing
Tax schemes
But…business as usual for serious BTL investors
LLP

9. Recent developments
Can I remortgage my BTL portfolio, use the proceeds for any purpose and get tax relief on the extra mortgage interest? YES
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10. Recent developments Interest Any purpose
Up to market value of properties when first let
Allowed to borrow to fund withdrawals of capital
But not for overdrawn current accounts
See HMRC guidance BIM45700
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11. Recent developments
£300,000
£100k
£175k
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12. Recent developments HMRC have recently challenged this approach
Interest on a remortgage loan on a buy to let property is a revenue expense “so long as the loan is wholly and exclusively for the purpose of the letting business”
We await the outcome of the First Tier Tribunal!!
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13. Stamp Duty Land Tax 3% surcharge from April 2016
Residential property only
Applies to individuals, companies & trusts
One property for married couples/ civil partners
Unless separated by Court Order or formal deed
Replace home? – refund if sale within 36 months
No relief for property development or trading
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14. Stamp Duty Land Tax
36 months
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15. SDLT rates - purchase price £400k
Home
Buy to let
£125k x 0% = £0 £ k x 2% = £2,500 £ k x 5% = £7,500 Total = £10,000
£125k x 3% = £3,750
£ k x 5% = £6,250
£ k x 8% = £12,000
Total = £22,000
Increase is £12,000
£22,000
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16. Capital gains tax (CGT)
2017/18
Annual CGT Exemption £11,300
CGT Rates on 2nd residential properties (Usual rates)
Basic rate band up to £33, (18%) (10%)
Higher/Additional rate bands > £33, (28%) (20%)
That is, an 8% Surcharge!
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17. Residential property ownership - Personal
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18. Residential property ownership - Personal
Acquisition
Stamp Duty Land Tax Extra 3%
Ongoing profits
Income tax Finance costs restriction and higher income
tax rates
Disposal
Capital gains tax Extra 8%
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19. Income tax on rental profits
Income tax rates & thresholds
BTL /18
Basic rate band (20%) ? £11,500-£45,000
Higher rate band (40%) ? £45,001-£150,000
Additional rate band (45%) ? Over £150,000
Personal Allowance £11,500 (2017/18)
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20. Capital gains tax on sale
Tax on gain on sale
Capital gains tax
Maximum effective tax rate 28%
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21. Residential property ownership - Company
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22. Residential property ownership -Company
Acquisition
Stamp Duty Land Tax Extra 3%
Ongoing profits
Corporation tax No finance cost restriction – up to 19%
Disposal
Tax on the gain No surcharge (unless ATED) up to 19%
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23. Corporation tax on rental profits
Corporation tax rates
2017/ / /20
Profits 19% % %
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24. Corporation tax on sale
Tax on gain on sale
Corporation tax 19%
Indexation?
Extraction
Income tax 38.1%?
Capital gains tax 20%?
Effective Tax rate 35% plus
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25. Personal versus corporate ownership
Company
Income tax rates higher
Less surplus available for reinvestment
Finance costs restriction
Overall taxes may be less on property sale
Lower corporation tax rates (plus indexation)
Full tax deduction for finance costs
Larger surpluses for reinvestment
Potentially higher taxes on property sale and profit extraction
More Inheritance Tax planning possibilities
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26. Our experience thus far….
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27. Couples planning Married couples or civil partners
Default is taxed on equal shares
Declaration of beneficial interest
Joint tenancy or tenants in common?
Declaration of trust
Tax declaration
Care where previous Own Main Residence occupation
Unmarried couples etc.
Actual profit share
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28. Transfer property into a company?
The issues
Transfer at Market Value so valuations needed
SDLT on transfer values?
Capital gains tax liabilities?
Financing issues?
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29. Transfer property into a company?
The issues
Often not a proper business
If there isn’t a business then;
Capital gains tax - You pay it on any gains
SDLT – You pay it on market value of the properties…
…yet have no proceeds!
Beware ‘schemes’ purporting to give tax advantages
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30. Conclusions - personal ownership
Investors are not fully aware of the extra tax costs
‘Dinner party’ investors are more concerned!
Some small scale investors are exiting the market, or de-gearing where it is possible
But our advice for many is;
Ignore incorporation…you won’t qualify
Look after the basics
Smaller portfolios suit personal ownership
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31. Conclusions – corporate ownership
BTL investors with larger portfolios are seriously exploring the incorporation option
Those running well established existing businesses at an advantage to incorporate
For other businesses, a proper assessment is needed
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32. Our experience to date…
BTL investors often not aware of the full impact of the tax changes
For serious BTL investors…its business as usual
BTL investors need ‘joined up’ advice – early in the process
Beware aggressive tax planning
No ‘one size fits all’…the devil is in the detail
Hale & Company LLP

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