A number of legislative changes over the last year have made Landlords wonder whether they should sell their portfolios and exit the Buy to Let market.
In April 2016 changes to Stamp Duty Land Tax added a 3% surcharge meaning that the Stamp Duty on the purchase of a £200,000.00 property leapt from £1,500.00 to £7,500.00.
The Deregulation Act 2015 introduced in relation to Assured Shorthold Tenancies entered into after 1 October 2016 new requirements for provision of Energy Performance Certificates and Gas Safety Certificates to add to the list of existing requirements for Landlords. Failure to comply will prevent a Landlord serving a ‘Section 21’ notice to recover possession of the property using the expedited 2 month procedure.
However, the coup de grâce for many Landlords will be the change to the taxation of property rentals phased in between April 2017 and April 2020. The effect of this change will see Landlords taxed on gross property rentals rather than at present on net property rentals that is to say after the deduction of interest and other finance related costs. This could add thousands of pounds to annual tax bills and in some cases could result in individuals who are presently basic rate tax payers being pushed into the higher rate band (40%) without any change in rental income because they can no longer offset their expenses against the rental income to keep them in the basic rate tax band.
Is it time to sell up? Landlords will undoubtedly consider this option as margins are increasingly squeezed. If you decide to take this route then careful attention should be given to your individual circumstances.
A phased sell off may be the best approach for some Landlords, selecting those properties where there is little or no capital gain and spreading disposals over tax years to take advantage of annual allowances. Jointly owned property should get the benefit of dual CGT allowances so there may be scope for husband and wife tax planning.
A lot of publicity has been generated about creating a limited company and transferring properties to it to avoid higher taxes on rental income. While the proposed reduction in corporation tax from 20% to 17% by 2020 and the ability to offset mortgage interest and other finance related costs against rental income inside a company is attractive, there are a number of considerations which mean this is unlikely to be the best option for many Landlords.
Leaving aside that the government may decide to legislate in the future to remove the tax benefit in companies, there are significant costs associated with an incorporation. More particularly Stamp Duty Land Tax on the transfer of each property as the company will effectively be buying the property from the existing Landlord. Potential CGT liability will arise on incorporation but relief is usually available where what is transferred constitutes ‘a business’. Dependent on the value of each property there may also be a future liability to Annual Tax on Enveloped Dwellings.
On balance while setting up a company for new purchases may be worthwhile it is likely to be too expensive for most to transfer existing properties.
If you would like advice in relation to your Buy to Let properties contact Glyn Evans on 01934 637911 or email firstname.lastname@example.org