The stamp duty holiday may have ended in October, but buy-to-let investors have a new incentive to buy now and restructure their portfolios quickly.
Landlords narrowly skirted another stamp duty tax blow in Chancellor Rishi Sunak’s Budget.
The Government had planned to increase the 3 percentage point surcharge on additional property purchases to 4 percentage points, according to the economic and fiscal outlook published by the Office for Budget Responsibility, the Treasury’s forecaster.
The OBR said: “A 3pc surcharge on additional property purchases was introduced in April 2016. It has been raised to 4pc in this Budget. HMRC has analysed the response to its introduction and found that it was strong.”
But Mr Sunak did not announce the tax change, suggesting it was pulled at the last minute before the Budget. This means it could still be incoming.
Buy-to-let owners have been hit by a series of punishing tax changes since 2017, forcing a quarter of a million to sell up and exit the market. But there are still ways for savvy landlords to save money on their tax bill and make the numbers add up.
Here we look at the most tax-efficient ways of owning a rental property.
Change the split of ownership
Chris Etherington of RSM, the accountants, said: “Married couples and civil partners could change the split of ownership on their buy-to-let property – which can bring tax benefits.”
For married couples or civil partners who own a rental property, the standard policy of HM Revenue & Customs is to split any rental income on a 50: 50 basis. This means any rental profits are taxed equally for each partner.
“Unfortunately, that standard treatment isn’t always good news for the couple from a tax perspective. For example, if one partner earns more than the other, it often makes sense for the lower earner to receive more of the rental profits,” Mr Etherington said.
There are two reasons for this. It may be because the lower-earner is not using their full personal allowance or because they are in a lower tax bracket. “Similarly, if one of them is a higher-rate taxpayer and the rental property has a mortgage, they may not be getting full tax relief for the mortgage interest, whereas their spouse or civil partner would,” he added.
Gifting a property to a spouse if it still has a mortgage attached incurs stamp duty – but it could be cheaper to do this now rather than later.
Move properties into a company
Another option for property investors would be to move their properties into a company structure, which can be more tax efficient.
They are essentially selling the home to their new company and so, as director of the latter, they would typically have to pay stamp duty at the higher rate on the purchase.
David Fell of Hamptons said: “Perhaps the biggest benefit is that all mortgage interest can be offset against tax when holding through a company, while from the 2020-21 tax year, just 20pc of mortgage interest can be offset on properties held in a personal name.”
Holding a buy-to-let portfolio within a company structure also comes with income and capital gains tax benefits, which are discussed in the last instalment of this series.
Mr Fell said there were, however, several hurdles landlords would have to get over before transferring properties to a limited company. “While a company can be set up relatively quickly and cheaply, the property must be sold to the company at market rate, which will require an independent valuation for stamp duty purposes.
“If the property is mortgaged, this transfer will also require the lender’s consent. Some buy-to-let lenders won’t lend to a company, meaning it’s usually best to transfer the property when the mortgage reaches the end of a fixed term.”
There are further downsides to incorporating, such as more expensive accountancy costs when filing company results and higher mortgage interest rates.
Landlords with extensive portfolios in a company structure may also be affected by the Chancellor’s planned changes to corporation tax. In the spring Budget he confirmed the rate of tax would increase from 19pc to 25pc from April 2023.
But the increase only applies to companies with profits of more than £50,000 a year, meaning landlords under this threshold will be protected and continue to pay the 19pc rate.
Buy-to-let owners may also have to pay capital gains tax when “selling” their property to their limited company.
Despite commissioning a report on CGT reform from the Office of Tax Simplification last year, which recommended bringing CGT on residential property more in line with income tax rates, Mr Sunak did not announce any changes to the tax in the autumn Budget.
This is a three-part series about how landlords can save money on their tax bill. In this instalment we look at the most tax-efficient ways of owning your property. The other parts look at how to pay less tax on rental income and when you sell