George Osborne’s summer budget resulted in major tax changes for landlords, leading many to consider the potential benefits of incorporating their business.
Previously, property investors have been able to claim tax relief on mortgage interest repayments based on their top level of payable tax but this was cut in the budget, restricting claims to the basic income tax rate, a move that is due to be bought in over a four-year period from April 2017.
These changes mean that top rate or higher rate taxpayers could find themselves facing an increasingly hefty tax bill, leading many landlords to consider setting up their own company as a means of mitigating the loss.
Right now, there is no doubt that this could be beneficial for many as corporate structures will still benefit from mortgage interest relief. The downside is that it is not known how long it will be before this loophole is closed.
It is also only really going to be beneficial to investors with more than one property and is a preferable option for people who are planning to keep properties in the long-term.
The major advantage, for now, is that a company structure can allow landlords to maintain their tax relief by separating PAYE income from rental income. The latter would be classed as business income and within a corporate structure would benefit for full loan interest tax relief.
What must be remembered, however, is that companies are liable to pay corporation tax and, whilst the amount of this is set to reduce over the next half decade, it does not look set to reach any lower than 18 per cent in the foreseeable future.
It is also essential that incorporation is completed properly in order to minimise the risk of a huge capital gains tax bill if a landlord needs to sell a property and it ends up being classed as a company ‘disposal’.
Other issues landlords must consider is the cost and time of setting up a company and the fact that money drawn out will need to be extracted as a dividend payment, which will be eligible for taxation.
There are also inheritance tax rules announced in the summer Budget which could limit tax allowances to consider, along with stamp duty regulations, but, according to many taxation experts, incorporation could still be a good option for landlords who want flexibility when it comes to building their portfolio and want to be able to change directors relatively easily should the need arise.