Announced in the Summer Budget of 2015, and first introduced on 6th April 2017, the Section 24 tax amendment represented a sea change in buy-to-let taxation.
It meant the amount of mortgage interest relief landlords receive for residential property finance costs would be restricted to the basic rate of tax. The changes are being phased in tax relief on mortgage interest payments eliminated on an annual 25% reduction until April 2020, when the relief will be zero, replaced by a basic rate (20%) tax credit.
Since April 1, 2016, there is another tax consideration when buying a property to let. There is a 3% surcharge on stamp duty which adds several thousand pounds to the cost of an average rental property purchase when bought by an individual as opposed to a company.
Section 24 applies to landlords who are UK residents with residential rental properties, regardless of location. Also non-UK resident landlords with residential rentals based in the UK, partnerships and trusts owning residential rental properties are affected. It is a particularly onerous tax on high rate taxpayers, many of whom will struggle to show a profit after 2020 if they have substantial mortgage funding.
The perceived Government objectives of introducing the Section 24 tax ruling would be (1) to reduce the number of ‘accidental’ landlords operating and professionalise the UK letting market, and (2) to stem the buy-to-let borrowing bonanza and encourage home ownership, thereby helping first time buyers onto the housing ladder.
It is though the Government wants to encouraging more professional landlords (including build-to-let and portfolio landlords), driving out the rouges and improving the stability and profitability of the sector “to the benefit of landlords and tenants”.
One way larger landlords can achieved this is by operating as a limited company, thereby avoiding the Section 24 rules.
However, there are pros and cons for operating as a small-scale owner or as incorporated landlords, and the benefits of either depend on many factors including the size of the operation, whether the business is a new one or an existing portfolio, and the personal circumstances of the owners.
Before making any changes to the ownership structure of a property investment business landlords should seek professional tax advice.
Buy-to-let mortgage deals are now more readily available for companies, since the Advent of Section 24, but they carry an interest rate premium.
Writing for the Sunday Times James Coney says that landlords who borrow to buy a property through a limited company will pay “substantially higher mortgage rates” compared to those who take out a mortgage as an individual.
Cony quotes individual buy-to-let mortgage rates being available as low as 1.81% on a two-year fixed rate offered by the Post Office, whereas a comparable deal when buying as a limited company is around 2.99% with Nationwide’s Mortgage Works. In both cases the deals are based on a 25% deposit and a set-up fee of £995.
Securing a mortgage for a new company with no trading record can sometimes be problematic without being backed with a personal guarantees, and transferring an existing property into a company tax shelter may involve capital gains and stamp duty liabilities.
David Hollingworth of brokers London & Country is quoted in the Sunday Times article as saying:
“For landlords with maybe one or two properties who are not thinking of adding to their portfolios, starting a company is not really being considered. Where we are seeing it is with landlords who have a number of properties already and are looking to expand. However, there are substantial costs. It is vital to get tax advice before taking any steps.”
Other mortgage deals currently available include:
3.15% two-year fix deal from Ipswich Building Society, with a 20% deposit and a £1,149 fee.
2.16% deal with a 40% deposit from Virgin Money, fixed for five years, and a £995 fee.
Company deals to compare:
Paragon offer a company deal at 3.45% fixed for two years, a 20% deposit and a fee of 0.5% of the sum borrowed.
Brokers are finding that the small-scale landlords with perhaps one or two properties are resisting incorporations, whereas those with many properties are embracing the idea.
A company is subject to corporation tax as opposed to individual income tax rates (20%, 40% or 45%). Corporation tax rates are lower currently at 19% and 17% from April next. However, withdrawing money from the limited company then incurs further taxation on the individual and dividend tax relief has been reduced (April 2018) from £5,000 of dividends per year tax-free, to £2,000.
Paul Falvey of advisers BDO told the Sunday Times journalist: “Tax alone is rarely a good enough reason for holding property through a company,”