Buy to Let Property Tax and Accounts

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In recent months the UK government have announced measures that will harm the profits for buy to let (BTL) property investors.  Charterwells accountants are active in helping investors understand these changes and to minimise the impact.

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Over the next few years most BTL investors will see rental profits fall and taxes increase due to

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• Mortgage interest relief being capped at the basic rate of 20%, which will be phased in over the next few years

• This may have a more profound impact as lenders will be looking to raise interest rates over the coming years also

• Abolishment of the wear and tear allowance

• An extra 3% increase in stamp duty tax, which applies for BTL property purchases

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The groups most at risk are the small investors who have large mortgages.  Also, since the relaxation of pension rules, there are more older investors who have recently invested in property.  They use rental profits as top up to their pension and in many cases to help make ends meet. 

 

So what can be done to reduce the harm on your Cash Flow?

 

A knee jerk reaction by many small investors is to consider a transfer of properties into a new company. These are due to the attractions of paying corporation tax, creating a director’s loan account and having control over the level of dividends to declare and pay out.

 

However, the transfer process into a company can prove to be very costly due to stamp duty tax, capital gains tax, mortgage redemption fees, legal fees, plus an ongoing increase in accountancy fees. Over the longer term it may also restrict the pool of lenders you can apply to for remortgaging.

 

Setting up a company may work if you are looking to start building a portfolio as it avoids these high transfer costs.

 

We are currently helping current and new clients, by looking at their current position/long term plans and are tailoring a solution for them.

 

Key areas to consider:

So assuming you own BTL properties in your personal name.  We can forecast and plan for the impact of these changes, so there are no unexpected drops to your cash flow.

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Other key areas to consider are:

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• Gifting a share of the property portfolio to a spouse/partner or family member

• Spending money wisely to improve the property, as it will attract a higher quality tenant, increase rent and decrease void periods

• The tax savings by switching lenders and reducing your mortgage interest cost

• The natural and expected increases in rent over the next few years

• Planning for inheritance tax

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Looking at the long term outlook for London and the South East, most pundits will agree that our population is set to increase, so properties will remain in demand due to a shortage in the housing stock. 

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So it looks highly likely that the long term property price increases will outweigh the reductions in rental profits in the short term.  

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Email us at enquiries@charterwells.co.uk or call 0800 612 6086