Loss of Interest Relief on Buy to Let Properties

leemagner
Nov 10, 2018
3 min read

The loss of interest rate relief at the higher rate of tax, on buy to let investments has this year begun to phase in down to 2020. The effect of this tax change for Landlords holding residential properties in their own name, as trustees or in partnerships, has yet to be fully appreciated, with interest rates at historically low levels, but with interest rates due to rise and as the loss of relief becomes fully implemented, the effects on higher rate tax payers will be significant. In some cases turning what was a profitable business into a loss making one.

Just this week, analysing the effect of the change on behalf of a client with a portfolio of a value of £6 million with borrowing of less than half, saw his effective tax rate on his portfolio income rise to almost 59% in 2021.

From April this year 25% of financing costs will only be deductible at basic rate, reducing by 25% per annum for the next 3 years. The calculation of the tax is computed by adding back the finance costs to the rental profit and then calculating the tax on the total. The second stage is to apply a tax credit of 20% against the loan interest, which is allowed as a deduction from the tax calculation.

UK Companies are exempt from these above tax changes and therefore are still able to deduct in full, the interest costs of their buy to let properties. This, coupled with lower taxes on both the rental income (Corporation Rate is currently 19% as opposed to Income Tax of up to 45%) and on the Capital Gains Tax ( Companies pay a rate of 20%, as opposed to the higher rate of 28% for individual tax payers) when selling properties owned by companies, has made UK companies the preferred vehicle when looking to purchase residential properties for letting.

For those Landlords who currently have BTL portfolios in their own name, or in an offshore company, the question is; can they now transition into a company and if so, what are the costs of doing so?

The simple answer to this question is yes. Incorporating an individual, partnership, or trust portfolio into a company or transferring from an offshore company, can be done and this is a space, where my work with Lauriston Saggar LLP has provided clients with comprehensive & regulated tax advise to implement such a transition. Click here to request a free call back

S162 Relief

The cost of incorporating will depend on the nature of your Buy to Let business and how you currently hold the same. The keyword here is "business". As a general rule market value rules apply as regards the net gain on transfer, but S162 of TCGA 1992, provides relief for incorporation of a business, whereby the gain on the transfer can be rolled over into the base cost of shares issued on transfer. This will not apply where there is just a passive investment, as according to HMRC guidelines , there has to "activity".

Whether your buy to let qualifies for S162 Relief is a question of fact and degree, but generally spending at least 10 hrs a week on the business, with a portfolio of 5 or more properties, with a gross income of more than £20k per month is indicative but not necessarily conclusive evidence that it is a business as opposed to a passive investment. In some circumstances it can be advisable to seek a HMRC non- statutory clearance. Lauriston Saggar LLP can advise on whether your business would qualify for S162 Relief.

SDLT (Stamp Duty)

Having established that S162 Relief is available, the other matter to consider as to costs, is the potential SDLT (Stamp Duty) on the transfer of the properties to the company.

As an individual, transferring the property into a company, to which you are "connected", the market value rule in S53 FA 2003 applies, so that SDLT will be payable.

Where the transferor is a partnership, this rule is overridden by Schedule 15 , Finance Act 2003 and therefore no SDLT is due, even though the partners are connected with the company. Joint ownership of the properties is not sufficient for HMRC, as there must be a business carried on jointly with a view to profit. At Lauriston Saggar LLP, we help clients navigate these provisions. To understand how might assist make contact with me here

Lee Magner is a practising Barrister with Ullger Chambers, Gibraltar and consultant to Lauriston Saggar LLP, London.

This article is written by Lee Magner, Barrister at Law. All rights are reserved, and any content is for information purposes only and not to be relied on as advise in any circumstances. For more information and advise on any subjects covered by this article, contact Lee here or at the two firms listed above.