Buy to let landlords who can see hefty tax rises on the horizon when the government starts phasing out mortgage interest relief next year are looking for safe havens to shelter their cash – but few can expect to find one.
Lawyers and accountants are hawking some potential tax solutions, but only time will tell if they work.
The problem stems from the fiercely contested tax treatment of buy to let as an investment rather than a business.
HM Revenue and Customs has fought many cases trying to prove working as a full time landlord renting out homes is a business – and in all but the odd one or two has won.
Personal ownership of letting property is where the restriction on finance cost relief really hurts. Not only do higher and additional rate taxpayers have their relief capped at 20% from 2020, but the way property profits are calculated changes as well.
The tax is on turnover less tax credit for 20% mortgage relief will drag many basic rate taxpayers into the higher rate tax net as well as penalising top earners.
The tax options for buy to let landlords will vary according to their personal financial circumstances, but broadly fall into a few categories:
- Retaining personal ownership – this will see income tax bills rise for many and some will possibly income tax on rental losses
- Forming a property company – That pesky investment definition is the problem here. Transferring business assets into a company generally attracts incorporation relief that cancels out capital gains tax on the disposal of the assets.
But buy to let properties are not business assets, so the owner pays CGT on the disposal of the portfolio and stamp duty at Chancellor George Osborne’s special rate hiked up by 3% on the purchase of the assets by the company.
Add to that the costs of setting up the company and rearranging the mortgages and a cost/benefit analysis is likely to show that the outlay is probably worse than the extra tax a landlord will pay in 2020.
- Joining up with a limited liability partnership (LLP) – That pesky definitions trikes again. A partnership or LLP must carry on a trade or a business, so although allocating the property to the partnership may avoid the tax issues of incorporation, whether the venture really is a business is doubtful
The cheapest and most tax-effective option is to where possible structure buy to let ownership between spouses.
HMRC has a procedure for doing this by filing a Form 17 and declaration of trust, which is a fool proof, tested solution, unlike incorporation and forming an LLP partnership.