Section 24 – Buy To Let Tax 2020 Update | Landlord tax | Incorporation Relief Section 162

Section 24 – Buy To Let Tax 2020 Update | Landlord tax | Incorporation Relief Section 162

19:00 PM, 10th January 2020, About A year ago

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As of today, a video recorded at the Baker Street Property Meet in regards to tax planning solutions for landlords facing problems with the section 24 restrictions on finance cost relief has been watched more than 34,000 times.

The following is an update to that video, again hosted by Ranjan Bhattacharya in an interview with Property118’s Hon. Legal Counsel, Mark Smith, Head of Chambers at Cotswold Barristers.

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Consultations include Fact Find, expert analysis and a recorded video conference with your Property118 Consultant and your Accountant. Thereafter, our recommendations will be reviewed by Cotswold Barristers (at no extra charge). If they agree, and if you instruct them to complete the legal work to implement our suggestions, Cotswold Barristers will adopt our recommendations as their own professional advice, for which they carry professional indemnity insurance of £10,000,000 per claim. All consultations are confidential and you will be provided with a copy of the recording of the video conference. We GUARANTEE total satisfaction or a full refund.
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Section 24 Explained

The Case Study below explains why so many property rental business owners are considering incorporation, by comparing the tax position of a private landlord vs that of a private hotelier:

  • Let’s assume that both businesses own assets worth £2,000,000 and have 75% LTV mortgages secured on them at an interest rate of 5%. In other words, their annual finance cost bill is £75,000.
  • Now let’s assume that both businesses make profits after finance costs and all other expenses of £50,000.

The hotelier will pay £7,500 of income tax. This is broken down as follows; £nil on his first £12,500 of net profit and 20% tax on the next £37,500.

However, the private landlord cannot treat his finance costs as a legitimate cost of business in the same way as the hotelier. Accordingly, his tax bill is £27,500.

This is because his taxable income is treated as being £125,000 due to being unable to claim his finance costs as business expenses. Furthermore, for every £2 of taxable income over £100,000 he loses £1 of his nil rate tax band.

Accordingly, the landlord pays tax at a rate of 20% on the first £37,500 (which equates to £7,500) and then 40% tax on the other £87,500 (which equates to £35,000). This adds up to a whopping £42,500.

The government then grant him a tax credit equal to 20% of his finance costs, in other words £15,000 off the £42,500 leaving him with a net £27,500 of tax to pay.

To summarise, the private landlord pays nearly four times as much tax as the private hotelier, even though their financing costs and business results otherwise produce identical levels of actual profit.

HOWEVER, if both the landlord and the hotelier operated their businesses within a Limited Company structure, they would pay exactly the same amount of tax.

Key Points To Consider BEFORE You Incorporate

  1. How much better off will you be? To help you to calculate this we have developed software you can download for just £97 – details via THIS LINK
  2. Will CGT be payable? Given that you will be selling your properties to the Limited Company, you will be crystallising your capital gains. Ordinarily, this would mean that Capital Gains Tax is due. However, in certain circumstances, ‘incorporation relief’ will enable you to roll some or all of the capital gains into shares in your Limited Company which you exchange for equity in your properties. The rules are explained HERE. The software mentioned above also calculates the CGT position for you.
  3. Will the company need to pay Stamp Duty when the properties are transferred into it? Given that the company is essentially buying the properties from you, Stamp Duty would ordinarily apply. However, in certain circumstances, relief is available. The rules are explained HERE. The software mentioned above also calculates the Stamp Duty position for you.
  4. Will you need to refinance? The costs of refinancing can be extremely high. Furthermore, if you are tied into mortgage deals with early repayment charges or you have particularly competitive financing terms already, it may not be economically viable for you to apply for new mortgages in the Limited Company name. However, there are legal structures available which enable you to defer new financing until it is financially viable for you, or to the end of the existing mortgage term. Details HERE.

What on earth are you waiting for?

Charles Darwin once said; “it is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is most adaptable to change.”

When the former Chancellor of The Exchequer George Osborne announced in the Summer Budget 2015 that the basis of taxation for individual landlords was to change, those who had bothered to listen were in disbelief and the rest were oblivious.

I liken this to a madman announcing that volcano is soon to erupt.

Nevertheless, some landlords adapted.

After some time, clause 24 of the second Finance Bill of 2015 finally passed through Parliament, the House of Lords and received Royal Assent to become  FA2015(part 2)/Section24. This was the equivalent of all scientists confirming the date and time the volcano would erupt. Those who had become aware were still in shock and disbelief, but a few more adapted.

By January 2019 some landlords began to feel the effects and yet some landlords are still either oblivious or looking up at the lava flowing towards them, frozen in either disbelief or fear. Nevertheless, most remain oblivious to the risks to their business and only a fraction of those facing being burned to a crisp have even investigated their options, let alone adapted.

We are now approaching the end of the third year after the eruption and the lava is fast approaching the bottom of the mountain, yet most landlords are ignoring it. Within just a few weeks they will pay the tax due on their 2018/19 income, which is when the problem was only half of what it is going to become.

This is landlord apathy at it worst.

When will they move?

For just £400 we can complete a full Fact Find and analysis of your position and then prepare a bespoke report and recommendations outlining the optimal adaptation plan for you.

This can then be checked by your existing professional advisers and our Hon. Legal Counsel, Mark Smith, Head of Chambers at Cotswold barristers who will adopt our recommendations as his own professional advice subject to you agreeing to instruct him to deal with the legal work necessary for implementation. Even after all of that, if you’re anything less than 100% satisfied you can claim a full refund of our £400 consultation fee under our GUARANTEE of total satisfaction.

So what are you waiting for?