As a result of the changes to Stamp Duty and income tax, landlords must be directed towards independent taxation advice to ensure that they fully understand the impact of these changes and consider the structure of their portfolios.
Aldermore’s recent research, conducted through a YouGov survey, indicated that 52% of landlords do not feel that their plans will be affected by the taxation changes. However, more than one in 10 stated they would now consider setting up a limited company.
For additional properties a landlord’s decision to purchase in a company structure will depend largely on considering the individual impact on the customer’s level of taxation and formulating a coherent strategy for any future exit plan.
Restructuring existing portfolios into a limited company, however, is more complicated, and brokers should ensure that their clients have considered three main topics:
As a result of announcements by the Chancellor, an additional Stamp Duty charge of 3% would be levied on any properties already owned as they would qualify as a new purchase when transferred into the limited company.
Lenders vary in their treatment of incorporation and, whilst some will enable a mortgage to be transferred, many would require repayment. There may also be further costs if the existing mortgage is still under an early repayment charge period.
There are also fewer lenders and mortgage products available for limited company borrowers. Whilst Aldermore, for example, has aligned its product rates for ownership in either a personal name or a limited company, many others continue to charge a higher rate.
Capital Gains Tax
In April, the basic rate of Capital Gains Tax (CGT) was cut from 18% to 10%, with higher rates falling from 28% to 20%. However, gains made on residential property will not be eligible for the newly lowered rates. Instead the Chancellor has maintained the existing rates, equivalent to an 8% surcharge. In most instances, transferring a property would be considered a sale and a purchase, and any increase in value would become crystallised and assessible for CGT.
With the recent Iress Intermediary Mortgage Survey finding brokers are set to control 70% of the mortgage market in 2016 and 2017, it is vital that brokers are prepared for their increased responsibility as a result of these changes. But brokers must keep in mind, for the more complex deals, that clients are likely to want to discuss with them, landlords should be advised to seek independent tax advice.