March 20th, 2017
When the former Chancellor George Osborne announced his first Budget after the General Election in 2015 he dropped a ticking time-bomb on buy-to-let landlords which is about to explode.
Mr Osborne unveiled a phased tax increase for buy-to-let landlords, which comes into force in April and is due to be fully implemented by 2020.
Many thought the current Chancellor Philip Hammond would use the recent Budget to reverse this decision – but he didn’t.
So, from next month – the start of the new financial year on April 6 – landlords will no longer be allowed to deduct the cost of their mortgage interest from their rental income when they calculate a profit on which to pay tax. In other words, tax will be applied to the gross rent received, rather than what is left of the rent after the mortgage interest has been paid.
Landlords can claim tax relief fixed at 20% per cent, but the upshot of this incoming legislation is that every landlord who pays a higher rate of tax (at 40% or 45%) will pay more. And many of those who are basic rate tax payers will also pay more, because the change will push them into the higher rate tax bracket.
What does this mean for contractor property investors?
Contractors are a group well-known for using surplus income to invest in properties. Contractor buy-to-let is an excellent investment model. But with the new changes about to come in, is property investment still a worthwhile option?
We’d say it is, because there are steps that can be taken – which don’t fall foul of IR35 – which will safeguard contractors and their buy-to-let investments from the tax changes.
One step would be for buy-to-let contractors to review their existing mortgage arrangements. Remortgaging could bring lower interest payments which would wipe out, or mitigate, the increase arising from the new tax regime.
Moving the buy-to-let over to your spouse is another solution, if the spouse is a basic rate tax payer. But you’d need to ensure the move wouldn’t push your partner into the higher rate tax band.
Creating a limited company is a third option favoured by many contractor landlords. Contractors can legitimately set up subsidiaries of their existing company and create a company buy-to-let.
Of course, a company buy-to-let incurs corporation tax, but this is half the higher rate tax, and is still subject to relief.
Before setting up a company, you need advice, and the process does involve thought and paperwork, but once up and running it is no harder to manage than a traditional buy-to-let.
Historically, mortgage providers have charged more for a company buy-to-let, but this differential has been eroded in recent years. Given the tax advantage, contractors could be better off. And unused funds within the company could also be unlocked to use for further property purchases.
We know this tax change is coming – and coming soon. So, if you are a contractor landlord, or considering contractor buy-to-let, then now is the time to look into making changes.
Media Contact: Sarah Middleton, Public Relations Manager
Tel: 01489 555 080