Income Tax on Rental Property

The new budget presented by Tory MP George Osborne was similar to an attack on buy-to-let investors as it has undoubtedly prejudiced future savings for buy to let investments in the residential properties against other financial investments.

Both the Bank of England and the Conservative Chancellor are behind this stealth attack against the UK buy to let sector. This step is taken as an attempt to avert the increase in property price that has hugely inflated London and the South East of England from becoming any worse. In the whole process, the tax relief that residential landlords get for finance cost is going to be restricted to the basic rate of their income tax, this is due to be phased in from April 2017.

You are likely to get affected if you’re a:

  • UK resident that owns residential properties in the UK or overseas
  • Non-UK resident individual that owns residential properties in the UK
  • trustee or beneficiary of trusts liable for Income Tax on the property profits
  • an individual who own such property in partnership

It won’t affect you if you are a

  • UK resident company
  • Non-UK resident company
  • Landlord if furnished Holiday let-Inns

Here are 4 ways in which these tax changes would be unfavorable for Landlords:

1: Stamp-duty for buying Secondary Properties:

The first effect increases in Stamp duty which is going to be 3% higher than before since April For instance if you are buying secondary properties after your primary house, and if the property is worth more than £400,000 you will have to pay a stamp duty £22k up front that is around 5% before you have even made any profit from it.

Income Tax Relief on Mortgage Interest:

Secondly, Tax relief on the mortgage interest has been cut to the basic rate, so there is nothing to worry about for the basic rate tax payers but if you’re like most people, a higher tax payer a 40 or even 45% tax payer this change is going to cost you some heavy money. So basically there is no change for the basic-rate taxpayers but a high effective increase in income tax for higher rate taxpayers.

Income tax charged on buy to let revenue, not income:

Thirdly, there is a very crafty change that is not obvious for the starters but nevertheless very costly for residential landlords.  It can be explained as the capital gains tax structure has been changed so in other words if you use a buy to let investment you still pay 18 to 28% capital gains tax. However, on any other investments, the rates are very much lower, they are as low as 10% now. So other investments in terms of capital investment are much more attractive then buy-to-let investments.

Wear and Tear allowance:

Fourthly the 10% allowance for wear and tear has been removed, so now you will have to prove any expenditure that you spend on maintaining your buy to let property that is you have to make it adequate for deduction by providing bills.

There has been a reform in the wear and tear allowance for the fully furnished properties that enables all residential landlords to withhold the costs they actually suffer on replacing furnishings, kitchenware, and appliances kitchenware.

Taking these measures together means that most buy to let investors are surely going to drop in to lose on yearly basis rather than making a profit because these are some big changes. So, with these new taxations your tax bill is going to be higher and income low due to which the interest in buy to let investment has considerably fallen down.

Using a Limited Company for tax:

The new Mortgage interest relief restraint coming in from April 2017 does not affect Limited Companies. Interest for limited companies is classified as a business expense and is fully deductible against income.
Companies have to pay corporation tax at a fixed rate without any consideration of its size and income.
The Corporation Tax rate is presently at 20% reducing to 17% in 2020. This makes the tax rate very attractive compared to 40% for higher rate taxpayers and 45% of additional higher rate taxpayers.

The money from this limited company can be taken out in three ways.

  • Salary, expenses, and benefits:
  • register our company as an employer with HM Revenue and Custom (HMRC)
  • You must take Income Tax and National Insurance contributions from your salary and pay these to HMRC, along with the employers National Insurance contributions
  • Personal use of something that belongs to the company must be reported as a benefit and pay any tax that is due.
  • Dividends:
  • the first £5,000 dividend income is tax-free.
  • Any dividends taken out in surplus of this will either be charged at 7.5% for a basic rate taxpayer
  • 5% for a higher rate taxpayer
  • 1% for an additional higher rate taxpayer. .

Companies cannot benefit from the yearly allowance of £11,100 against capital gains. So extracting the money of a traded buy to let property could be less tax effective than holding the property as an individual.

  • Directors’ loans:

When you take out the money out of the company  as a  “Directors’ Loan”, which must be repaid back within the fiscal year.

You must keep records of all the directors’ loans that are made in the company. There is certain tax-related rules related to how directors’ loans should be handled

Effects of the new Buy to Let rules when fully in forced:

The new taxation will push many into the 40% tax bracket.

If you received £10,000 collective rent, but paid £8,000 mortgage interest to your bank and £3,200 to (Her Majesty’s Revenue and Customs) HMRC, which means that rather than turning a profit, the buy-to-let house will now be costing you £1,200 a year, this is without counting any maintenance expenditure.

Even though this doesn’t affect the lure of having your own house for your own living, as there is no capital gains tax (CGT) on selling your personal  property many utilize this as a strategy for refurbing, with drawing funds and trading up.

To find out more about to reduce income tax on rental property click

Income Tax on Rental Property or call Baggy on 07971 241120