Timing can make a big financial difference with tax hacks – and one in five landlords could find this out the hard way.
New data shows around 19% of landlords are seeking to remortgage existing buy to let homes through a limited company.
The aim is to cut mortgage costs with a lower interest rate and to save tax, says the lender carrying out the survey, Foundation Home Loans.
And many landlords are in a rush to remortgage before mortgage interest relief disappears in April.
But the plan can backfire horribly if some of the tax facts are overlooked.
Landlords refinancing through a company typically started their business as individuals.
Tax rules specifically say that personal investors switching to a limited partnership or company lose the benefit of any losses they are rolling forward already to reduce profits.
Say a landlord with six or seven rental properties has total losses of £50,000 to offset against rental profits of £15,000 a year. The offset will take around three years to clear the accounts and wipe out any rental profits – and the tax due on them.
But switching into a company this year sees them evaporate and increases the landlord’s tax bill by at least £10,000- calculated as basic rate tax over three years on £50,000.
HM Revenue & Customs spells out how to deal with personal losses in online guidance called the Property Income Manual (PIM).
PIM is the tax bible for landlords as it details how HMRC will deal with income, expenses and tax relief incurred by a property business.
The plot may be unexciting, the writing dull and the story long-winded, but PIM really does set the parameters for property people and the way they should think about money and tax.