In April 2020 the final stage of changes to income tax relief rules for landlords came into effect. From 2017 the UK Government gradually reduced the amount of property finance costs (not just mortgage interest) private landlords can claim as an allowable expense. The result is that landlords who hold property in their own name, can no longer claim any finance costs against their income. The reduction of this relief has been replaced with a 20% tax relief however this relief also comes with additional stipulations. If profits are less than 20% of the finance costs, the relief available is 20% of the property profits. If there are losses brought forward, the relief if available for 20% of the taxable profits, this is also the case where the total rental income falls below the individual’s personal income tax allowance, here the relief would also only be permitted on 20% of taxable income.

Since most landlords have interest only mortgages, this has had a huge impact on private landlords who may find themselves now in a higher personal tax bracket. The solution here for many may be to transfer the property to a Limited Company.  This has many benefits, including the ability to claim all interest costs as an allowable expense, limiting the personal liability of the landlord and the additional tax benefits of Directors receiving £2000 tax free dividends on post corporation tax profits.

Transferring a property to a limited company can be costly with Stamp Duty and Capital Gains Tax to consider.  Until the end of June 2021 is 0% for properties valued at up to £500,000, then from July until the end of September 2021, stamp duty is 0% for properties valued up to £250,000. If you are thinking of transferring your property to a Limited Company, now could be the most cost-effective time.

SLDT Rates for residential properties: 8th July 2020 – 30th June 2021 

Property price  

 SDLT Rate

Up to £500,000

0%

£500,000.01 – £925,000

5%

£925,000.01 – £1,500,000

10%

£1,500,000.01+

12%

Example:

On a property priced at £600,000, stamp duty would be payable on:

   5% of £100,000 (the amount above £500,000) = £5,000
   Total: £5,000

These temporary rates will also override the special rules for first-time buyers.

Standard SLDT Rates for residential properties: (excluding the period between 8th July 2020 – 30th September 2021) 

Property price  

 SDLT Rate

Up to £125,000

0%

£125,000.01 – £250,000

2%

£250,000.01 – £925,000

5%

£925,000.01 – £1,500,000

10%

£1,500,000.01+

12%

Example:

On a property priced at £600,000, stamp duty was payable on:

   2% of £125,000 (the amount between £125,000 and £250,000) = £2,500 plus 5% of £350,000 (the amount above £250,000) = £17,500
   Total: £20,000

In this example, the new stamp duty rules will reduce the SDLT payable by £15,000.

Limited Company Vs Personal Landlord Tax

Held personally

Held through company

Income Tax

Taxed on profits as personal income at Income Tax rates in line with the Landlord’s personal allowance.

Corporation Tax

Letting is a business for corporation tax purposes.

Profits and gains on disposal are taxed at Corporation Tax rates.

PAYE

Accommodation Benefit in Kind considerations if there is private use by company owners.

Tax on disposal of the property: non-UK resident

From 5 April 2015 a non-UK resident is subject to CGT when disposing of an interest in UK residential property.

Tax on disposal of the property: non-UK resident

From 1 April 2019 non-resident companies are subject to Corporation Tax on UK immoveable property gains

From 6 April 2019, the disposal of shares in property-rich companies, by non-resident shareholders with 25% or more (with connected parties) interest will be subject to CGT.

ATED

Non-resident companies were subject to CGT under two regimes.

Extraction of funds

Income 

In general profits and gains are available for the individual as they are fully taxed as they arise.

Capital

A disposal of a property at a profit will trigger a capital gain.

A disposal is treated in most cases at market value.

Transfer to Limited Company

Capital disposal will be triggered. 

Extraction of funds from the company

Profit extraction

Income Tax

Potential double tax charge when profits extracted as dividends.

All individuals can receive a dividend allowance.

Tax above the allowance is on three dividend tax bands: 7.5%, 32.5% and 38.1%

Dividends received by pensions and ISAs are unaffected.

Capital Gains Tax

Subject to anti-avoidance rules meaning upon strike of or winding up capital is considered income and pay not be able to be extracted as capital distribution.

Ownership

The maximum number of legal owners of land and property is restricted to five.

Owners need to decide whether to hold property as joint tenants, or Tenants in Common and also to consider the effect on Joint Tenants of changing beneficial interests in the property.

Ownership

A company may have multiple shareholders.

Losses

There is no sideways loss relief for property losses. Losses may be offset against other profits from the same property business or carried forward.

Losses

Locked into the company and cannot be offset against the owner’s other income.

Losses can be offset against total company profits of the current or future years, as long as the rental business continues.

Annual Tax on Enveloped Dwellings (ATED)

No exposure to ATED charge.

Annual Tax on Enveloped Dwellings (ATED)

The ATED regime applies to high value residential properties held by non-natural persons (e.g. a company) subject to exemption when the property is let on a commercial basis. Filing is required to claim any relief that may be available.

The ATED charge is payable if the letting business ceases see Annual Tax on Enveloped Dwellings (ATED)

Inheritance Tax (IHT)

IHT likely to be due on death.  BPR relief is unlikely to apply in respect of let property: it is an investment asset.

Beneficiaries of the estate on death will receive the property at market value so there would be no capital gains tax for them to pay on an immediate sale.

IHT and non-doms

IHT only applies to UK situated assets for a non-UK domiciled individual.

From April 2017, IHT extends to non-UK domiciled individuals (or their trusts) where UK residential property is held indirectly through a foreign company or partnership. 

Inheritance Tax (IHT)

IHT likely due on death.  Business Property relief will not apply to shares unless the company has significant other non-investment activities.

On death a shareholder’s shares will benefit from an uplift to market value in the hands of the beneficiaries. Property held in a company receive no similar uplift.

Non-dom owners

From April 2017 IHT extends to non-UK domiciled individuals (or their trusts) where UK residential property is held indirectly through a foreign company or partnership.

VAT

Residential lets are always exempt, however commercial letting can be standard rated if the owner has Opted to Tax.

If the property qualifies as a Furnished Holiday Let, then the income generated is standard rated and the owner will have to charge VAT if they are registered.

VAT

Income from property letting is exempt from VAT with the exception of commercial letting which is standard rated.

The letting of Furnished Holiday Lets is a standard rated activity.

ContactIf you have any questions about transferring your property to a Limited Company, or you would like to discuss your personal tax perspective, contact a member of our team for an informal chat.