Second Property Tax Changes

Changes to Second Property Tax

The start of the changes to how property income is taxed kicks off in earnest April 2017. As always, there is a clamour for understanding of how the tax changes will impact. Whilst the changes have been known for some time it is only now that investors are starting to buy or invest with the new rules in mind.

There remains a fair bit of ambiguity over how easy it is to transfer ownership between personal and limited company, this will become much clearer once the first case is contested and ruled on. Until then take decent legal advice from a firm that truly understands property.

As for the changes to taxation of income, here is a basic guide to what it means for tax year 2017/8.

The Changes To Investment Property Tax

This example shows the impact on an individual with a single Buy to Let property, PAYE income of £42,385 or at 40% tax bracket.

investment property tax guide

What this means is;

  • Tax is paid on the total income less property costs (does not include financing costs)
  • For this tax year an allowance of 20% is allowed of the total finance interest. This tapers off in future years

If the figures don’t look concerning then put it in terms of margins, your net margin has just dropped 22% and is going to get worse in coming years, ouch.

The Limited Company Option

For the higher rate tax payer then consider that limited company profits are subject to Corporation Tax at 20% currently. The question over whether you can easily transfer property into a limited company remains mute and subject to different opinions, take good advice over it.

It remains though that many landlords will find themselves liable for more tax as a result of the changes and will be searching for alternative options to protect their profit.

There is a fallacy that buy to let mortgages for limited companies are more problematic, they’re not. Property finance for a limited company can offer some real tangible benefits to the borrower, rather than be more problematic they can be more adaptable, easier to source and offer a greater volume of lending.

Bear in mind also that owning a property in a limited company can mitigate your personal risk should something bad happen. Whilst commercial lenders will always want a personal guarantee the property and the liability it generates remains ring-fenced.

The bottom line is that there now needs to be more consideration to how you structure your property portfolio. The lending isn’t going to be the issue, the tax side has suddenly taken priority.

If you want to look at your mortgage options for property investment and buy to let then please get in touch or add your comments to this post and we will get back to you.

By Dave Farmer

let's talk business lending


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