In the summer 2015 budget the chancellor announced plans of a number of direct attacks on private landlords.
However this was not the whole picture as the introduction of other changes later or separately shows us the government’s intention and determination to remove what they see as “Accidental Landlords”, these are the individuals who have acquired few properties over the years and their portfolio is not large enough to be classified as a business.
Moving forward HMRC would want to see more “professional Landlords”, these are landlords that use a limited company as a vehicle to run their property portfolio, this would provide a more stringent reporting on the income & Profits from the property business.
In the 2016 budget the chancellor announced a reduction on capital gains tax on most assets, dropping from 18% and 28% to 10% and 20% however residential properties remain at the previous levels.
The introduction of High Income Child Benefit Charge which was another tactic to claw back child benefit from families where any individual has earnings over £50,000.
And then the removal of the 10% wear and tear allowance from tax year 2016/17.
Also taking into account that Basic Rate tax band was reduced from 2010/11 level of £37,400 to 2015/16 level of £31,785 pushing more people into the higher rate and although the basic rate band had increased slowly since 2015/16 it is currently only at £34,500 for the 2018/19 tax year.
At first glance when we consider the points above it appears that running a property company is very attractive especially when we take into account the lower tax on profits and the better relief for interest and losses. However there are draw backs that need to be carefully considered.
The advantages to using a limited company;
The disadvantages of using a limited company;
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Usually is difficult for a small business to attain finance and often the owner of the small company has to borrow personally and lend to their company thus losing the corporation veil and personally becoming liable for the loan.
Another concern that these small business owners have is that they think they lose out on claiming tax relief for their loan, however where money is borrowed to invest in a “close” company carrying on a qualifying activity, the investor may claim relief for the interest arising as a deduction against their personal taxable income including their salary or profits from their self-employment.
What are the conditions for this relief?
As mentioned above it has to be a “close” company, generally if a company is under control of five or less people then it’s a “close” company.
The investor must either hold some ordinary shares in the company and work for the majority of their time in the management of the company or have a “Material interest” in the company.
A Material interest is defined as where more than 5% of the company’s share capital and shares are held, this can include shares held by “connected” persons (closely related family members) will usually be counted for this purpose as long as the individual holds some of the company’s shares personally.
The company should carry on a “qualifying activity”, this includes a profession, trade or property letting, so property investment companies may qualify, however they must be mainly letting properties to unconnected persons.
Advantages of borrowing personally
Disadvantages of borrowing personally
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Capital Gains Tax on Incorporation of a Property Rental Business
Have you overpaid Stamp Duty Land Tax (SDLT)?
Other Implications of Property Business Incorporation
SDLT on Property Partnership Incorporation
Income Tax for Non-residents investing in the UK residential property
Advantages & disadvantages of using a company for buy to let investments
Qualifying Loan Interest
The Ramsey Case, would your property portfolio qualify as a business?
Joint Property Ownership