Tax relief restrictions on property – should I incorporate?
In the 2015 Budget, significant changes were announced that impacted those with property portfolios. They included: the restriction on finance costs, changes to the tax relief on mortgage interest, even an additional levy on Stamp Duty Land Tax for buy-to-let landlords. These changes led many property investors to consider incorporating their property businesses for the purpose of negating some of the impact of these changes.
Now we’re in the first tax year where the changes actually come into force, here I review the changes and offer my advice.
Firstly, running through a couple of the big changes:
- From the current tax year onwards, tax relief for mortgage interest and other finance costs is to be progressively disallowed in rental income and expenditure accounts. Whilst there is a corresponding tax credit against the individual’s income tax bill, this is only at 20%, resulting in those paying tax at 40% or more being significantly worse off. However, this restriction applies to unincorporated residential property businesses only
- Higher rates of Stamp Duty Land Tax in the form of a 3% surcharge are now being charged on buy to let properties and second homes costing over £40,000. This came into effect on 1 April 2016 and applies to both individual and corporate purchases
The first point above has generated significant interest in the potential benefits of incorporating a property rental business into a limited company. However, there is far more to consider when deciding whether to incorporate a business than trying to reduce your tax liability.
Whilst incorporation may be a tempting and worthwhile step it is not a decision which should be taken lightly. Furthermore, bear in mind that reversing an incorporation is likely to be a messy affair.
There are also numerous other tax aspects to incorporating a business including capital gains tax, capital allowances, inheritance tax and VAT, and tailored, competent tax planning advice is essential before such a transaction is entered into. The new rules on taxation of dividends effective from 6 April 2016 also need to be considered bearing in mind that the tax-free dividend allowance is likely to fall from the current £5,000 to £2,000 – despite being scrapped from the Finance Bill due to the General Election.
A further consideration is the impact on existing and future funding arrangements, as incorporation will invariably go hand in hand with a re-negotiation or refinancing of any borrowing arrangements. Historic rates and lending terms in a changed marketplace may no longer apply with funders also focusing on the competency of the tax advice which sits behind any restructuring.
It’s essential to remember that the decision as to whether you incorporate your property portfolio is a multifaceted approach – which your advisors should have all the facts before recommending a solution.
Land Remediation Relief, or Contaminated Land Tax Relief, allows businesses to claim relief of 150% of the cost in cleaning up the site against their corporation tax bill.
Tax changes have led a significant number of property investors to consider whether it could be potentially beneficial to incorporate their business for the purpose of taxation.
Whilst many professionals in construction and engineering have heard of Research & Development tax relief, there is often a misconception that it is not applicable to these sectors.