With the latest government tightening of tax rules for buy-to-let investors, it is surprising that there are still people willing to put their money into real estate. In the tax year 2019/20, mortgage interest payments relief against rental income had been reduced to 25%. Come 2020/21, that relief disappears and will be replaced by a 20% tax credit which may adversely affect profits of many landlords.
The Bug-Bear for Mortgage Lenders
There’s general talk in the industry of mortgage lenders declining loans to landlords who could be breaking HMRC’s anti-avoidance rules. The problem starts when a landlord decides that to make the most of his investment he should transfer ownership of his buy-to-let into a limited company. The advantage of rental income earned by a company is immediate. All mortgage interest, repairs, and maintenance, managing agent fees and outlay for property inventory software are tax deductible in one form or another. However, mortgage lenders, despite charging higher fees and interest rates on buy-to-let mortgages, regard these beneficial interest mortgages with alarm – basically because most prefer dealing with individuals who they can see rather than a company with shareholders who have the advantage of hiding behind the corporate veil.
Negotiating the Mechanics of a Transfer
This is a minefield and not for the faint-hearted. Professional tax/legal advisers must be consulted. We’re talking here of possible Capital Gains Tax, Stamp Duty Land Tax, Corporation Tax, Income Tax, and even National Insurance if you make yourself an employee. At first, glance, applying for and obtaining a Capital Gains Tax rollover relief when transferring the property into a company would be the ideal. However, get it wrong and you might end up fighting your case in court.
Business Tools to Manage Your Portfolio
As with any well-run business, investing in property investment software is vital to keep track of everything you own. If you think this is a step too far for you, consider which businesses would use property inventory software and the benefits thereof. Tenants, lease records, contracts, communication history, repairs and maintenance requests, late-payment records, inventories with photos and on-site property inspection records can all be updated and accessed at the click of a button.
At the end of the day, the decision to incorporate is all down to careful tax planning – not tax avoidance.