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Without wishing to scare-monger, our tax partner, RITA, has posted the following on their blog:"Whilst it is just rumours, we are hearing whispers the government is considering the restriction of interest relief for company owned property too. And we are hearing this more and more. The Budget is coming up soon, so could there be further surprises in the pipeline?
The traction began to grow, when the government up-dated a consultation back in January, albeit, a very short one (!) at just 8 days in duration, and slap bang in the middle of January – the busiest month of the year for personal tax. The consultation can be found by clicking here and with reference to section 6.2 it states: “Question 2: Should an interest restriction only apply to multinational groups or should it also be applied to domestic groups and stand-alone companies?”
Of course, whilst it is just a remote possibility, here at RITA4Rent, we are of the opinion that with this government and their relentless attacks on landlords, anything is possible!".RITA blog Even more disconcerting are the rumours about companies’ ability to offset interest payments against taxable revenues. If the Financial TImes is right, these might be limited to 30%.For landlords rushing to wrap their policies within a company structure, this could mean the company will only be able to put a maximum of 30% interest costs against revenues.Interesting to see how this plays out on 16th March with the new budget but I expect there are more surprises for landlords in the pipeline ....
Thanks for the heads up as I was considering my options of putting property into my LTD co but I think it is best just to wait for the 16th and deal with the facts thereafter!
It is amazing how this can all be based on us "not being a business" when HMRC have already stated we ARE a "business" in their very own manual article BIM45700 - can they really just move the goalposts like that! I know they are talking about capital accounts but they are referring to it as a "property business" so how come they are now "investments"
BIM45700 - Specific deductions - interest: Withdrawal of capital from "a business"
This chapter applies for Income Tax purposes to the computation of trade profits and property income. References in the text to a ‘business’ should therefore be taken to include both trades and "property businesses" The chapter does not apply for Corporation Tax purposes, where there are separate rules in the loan relationships legislation (see CFM11000).
S34 Income Tax (Trading and Other Income) Act 2005
A proprietor of a business may withdraw the profits of the business and the capital they have introduced to the business, even though substitute funding then has to be provided by interest bearing loans. The interest payable on the loans is an allowable deduction. This is on the basis that the purpose of the additional borrowing is to provide working capital for the business. There will, though, be an interest restriction if the proprietor’s capital account becomes overdrawn, see BIM45705 onwards.
Mr A owns a flat in central London, which he bought ten years ago for £125,000. He has a mortgage of £80,000 on the property. He has been offered a job in Holland and is moving there to live and work. He intends to come back to the UK at some time. He decides to keep his flat and rent it out while he is away. His London flat now has a market value of £375,000.
The opening balance sheet of his "rental business" shows:
Mortgage £80,000Property at market value£375,000
He renegotiates his mortgage on the flat to convert it to a buy to let mortgage and borrows a further £125,000. He withdraws the £125,000, which he then uses to buy a flat in Rotterdam.
The balance sheet at the end of Year 1 shows:
Mortgage £205,000Property at market value£375,000
Although he has withdrawn capital from "the business" the interest on the mortgage loan is allowable in full because it is funding the transfer of the property to the business at its open market value at the time the business started. The capital account is not overdrawn.
There is more guidance on overdrawn capital accounts at BIM45705 onwards.
I may be taking this out of context having not read the manual but on the face of it it looks like we are a business one day and investors the next!
PS - sent an email to my local councillor and she hadn't heard of the changes, surprise surprise! everybody needs to speak with their councillor directly to raise awareness so that they can voice their concers too. Some may even be landlords who will be seriously affected themselves.
This has been my fear from day one. They will wait until landlords have sold their privately owned properties into their new LTD companies, take the SDLT and them change the rules to include small LTD companies in the tax changes.
Thanks for your comments Mary.I thought long and hard about posting this for fear of scare-mongering, but two credible sources have now made comments, so it cannot be ignored imho.All will become clear on 16th March ....
Vanessa Warwick Landlord and Co-Founder of PropertyTribes.com **Book your FREE portfolio review and health check with Property Tribes Financial Services**
This Government are making it very clear that they want more large corporate and pension/investment fund investing in homes to let. They now have to come up with something which will only hit smaller landlords while not disincenting these big players. YPN Magazine has just published my article on this subject. Here are some extracts
"In 2012 the coalition government published a report by Sir Adrian Montague, saying it offered “a blueprint” for encouraging more institutional investment into the sector.
“The vast majority of private-rented homes in this country are managed by individual landlords.But Sir Adrian’s report highlights the ‘real potential’ for investment in largescale development of homes built specifically for private rent by professional organisations.
In their earlier report “Laying the foundations: a housing strategy for England” published in the autumn of 2011, they said:“To help tenants and to deliver more rented homes, we are supporting growth and investment in the private rented housing market, as the key to increasing choice, access and standards in the sector. The private rented sector is continuing to grow in size and importance – that is why we are supporting landlords and investors to invest – building onmeasures announced at Budget 2011.
“The 2010 Private Landlords Survey has shown a further shift in the proportion of the sector being owned and managed by private individuals, who now account foralmost 90% of all private landlords and are responsible for 71% of all private rented dwellings. Only 1% of residential stock in the UK is owned by institutions, compared with around 10–15% in most European countries. This provides a clear opportunity to grow and diversify the investment base, attracting new types of investor and new sources of funds.Institutional investors are typically interested in large-scale holdings as well as an acceptable and secure rate of return. In the 2011 Budget, we made key changes to support large-scale investors in rented property.
Changes to the Stamp Duty Land Tax (SDLT) treatment of bulk purchases of homes addressed a long-standing tax distortion which previously favoured individual purchases ahead of large-scale investment. This will help property management companies to take on larger portfolios. Large-scale investors will now pay a typical 1% instead of 5% on bulk purchases, as Stamp Duty will be assessed on the average value of individual properties instead of on the overall value of the portfolio.”That 2011 Budget had already distorted SDLT between small investors and larger ones. Skip forward to April 2016 and thedifferential will increase further with small private
The HCA launched its private rented sector initiative in May 2009 to encourage institutional investors into the market.“The original intention is to attract institutional investors such as pension funds who put money in a fund that buyshomes. The return goes to the investment fund and re-invested,” explains Robert Davies of the HCA. “We want to create a new asset class. What we’d like to see is as much investment in the housing supply as possible through this route to mirror what you see in Europe and the US.”
Government have made it clear that their agenda is to push smaller private landlords into a niche market where we are only supporting the failure of Social Housing. They need us at the moment but they don't really want us and they certainly intend to support large investors when they cheery pick the best tenants.
Only my not so humble opinion of course.
I agree Mary.It is utter madness when social housing is in decline.Housing Crisis? You ain't seen nothing yet!See also our about how Institutional investors set to revolutionise private rented sector which has been documenting this trend.It's like watching a car crash in very slow motion!
Osborne intends to destroy the small PRS LL
If they think they can escape his clutches think again
Politically he would lose few votes if small LL were forced out of business
Few tenants vote Tory so the Govt doesn't care if mass homelessness occurs
They know most tenants will sofa surf etc
LL with less than 15 properties can kiss goodbye to their business even if they have incorporated
Most rental property will be bought from small LL by big LL
Osborne wants to reduce leveraged rental properties
Of course he doesn't mind very large corporate leveraged LL
Small LL would do best by selling up or reducing leverage to zero somehow
For political reasons only he is trying to turn the concept of business on its head
We can only hope that the JR is successful to validate how wrong the turnover tax is
I dont believe Osborne will achieve his Prime Ministerial ambitions, Boris will see to that!
Boris will then cancel the ridiculous turnover tax
The quickest and most effective way to reduce leveraged LL is to require that no more than 50% LTV loans will be allowed
This could be reduced further if Govt wishes to control further the numbers of leveragedC LL
Controlling mortgage credit is a far more effective way to manage leveraged LL
Gradually leveraged LL would wither on the vine and those that could afford to become leveraged LL at such low LTV won't be able to buy so many properties
To be a leveraged LL with inability to increase rents to cover the increased taxes make the property unviablhe
The LL would be better off selling up
Why run a business for no little or no profit!!!
I believe that as long as Osborne is Chancellor then the small LL corporate or otherwise is on borrowed time
The rent increases required just to pay the new taxes let alone any increases needed to cope with inflation or IR rises makes it highly unlikely that any tenant will pay
I personally will be threatening my tenants that they either pay the increased rent or I will sell the property
Most tenants will realise they have little choice as there us already a dearth of rental property especially in the South
The PRS is going to be in real trouble in the coming years
For those that have made their money, I'd sell up and bank profits or have fewer properties but that are unencumbered
Tenants and council will be facing turgid times as the small LL is hounded out of business
I have set up my ltd co for two reasons
1 to buy some of my own BTL Houses
2 To manage my Bussiness ie act as the manageing agent
I intend to cream off profits of my BTL useing my own Ltd Co
The Ltd co will do the following
Repairs I have to be carefull here not to employ tradesmen so my plan is to have work done by a Builder and than charge a managemnt fee
Arrange Insurance agan a Managment fee woud be charged
Manangement fees for collection of rent
The result woud be higher costs on my BTL
Profts within the Ltd co ca be extratd by te followng
Salary of under £8000pa
Dividends of £5000pa
Directors Pension Plan
Provide a Company Comercial Van
I would rather pay Coparation tax of 20% than my BTL income be taxed at 40% which it is at present
Even if there was a restriction of intrest rates I woulld be better off
There are wispers about the views above what I will say there were no wisprs about Clause 24 It came out of the Blue ????
And if my hunch is right the tory boys want to encourage large Landlords to come into our market
Granger PLC and L&G ae two arge companys who have plans
I have come to the point in Bussiness that I am happy to spread around my options
On the Traditional BTL I can see in future years that all the Tax relife will go unless we win our case in court
I am under the firm opinion the Ltd Co work well for some Landlords Passing on weath is another area a Ltd Co works well and it can be via a trust
We all have to make our own judgement on this sort of thing and im for a Ltd Co for some of my bussiness
Perhaps this is also a move to taper off tax relief for ALL company debt not just landlords as people assume. I suspect it is and will hear more in the budget. That would be helpful in my view to help reduce corporate debt over time from a macro economic stability POV but not nice for landlords or any other business to adjust their model too.
Key issue is not making this retrospective to old loans, only new ones.
That is absolutely correct. Any changes on tax relief should only be aplied to new mortgages/loans, NOT current mortgages.
It is so unfair that Landlords prior to C24 thought carefully about their options and decided to take a calculated risk by mortgaging their properties knowing that they could claim 100% of the interest, only to now find they are trapped in a situation where they are going to be paying more tax that the rent can even cover.
Also I wish the media would stop stating that previously Landlords could claim tax relief at the highest rate of 45% and now this is going to be restricted to 20%. The fact is that any Landlord, regardless of their tax rate, could claim 100% of the mortgage interest.
There is no doubt in my mind that George Osborne will continue his attack on landlords. It's entirely possible corporate landlords will not be allowed to benefit from a better tax position when he thinks he can gain more tax receipts. Incorporating an existing portfolio doesn't make sense to me right now and that's after going through the option with my accountant. It costs too much and is too vulnerable to attack as suggested here.
The only exceptions may be large corporate property owners, maybe over 15-properties. They will have incentives as it is clear he wants large scale corporates to control the sector. Unfortunately I only have 7 properties.
Would it be mean to suggest he is looking after big corporate interest at the expense of small scale landlords?