The following is a ‘Readers Question’ that was posted on the Property118 discussion forum in September 2021. Feedback on our response has included phrases like “Outstanding!”, “Solid Advice” and “I wish I had known about your services years ago”.
We need some Buy to Let Tax Advice on our Let to Buy Plans Please
My wife and I are looking to buy a larger more expensive home and let the one we currently live in.
Barclays have offered us some great interest rates because we have a large deposit for the new property and a lot of equity in the existing one, which they will give us a Buy to Let mortgage on.
We have a perfect credit score and plenty of income to cover the loans and being Barclays Premier Banking clients I think that’s why they are offering us such a good deal.
I have two initial questions in regards to tax and will look into booking a tax consultation with Property118 if you can help me with these two questions,
I do have a few ideas of my own, but I will not share them at this stage because I am curious to see what Property118 and it’s Members suggest first.
My first question is in regards to SDLT.
Is there are way around paying the additional 3% rate on the new home we are planning to buy?
My second question is in regards to the Section 24 restrictions on finance cost relief. We think we understand this means that we will not be able to offset the mortgage interest on our Buy to Let mortgage against rental income, but instead we will receive a 20% tax credit. If I am right, this means that we will effectively paying a 25% rate of tax, because we are 45% tax payers, on our mortgage interest on the Buy to Let. So, what’s the best way to structure this please?
Thanks in advance for your help.
Our initial suggestion is that you sell your existing home (the one that will become a Buy to Let) to a newly formed Limited Company. There will not be any Capital Gains Tax to pay because this property has (presumably) been your home from the day you first purchased it. Your company will pay SDLT plus the 3% additional rate on this transaction, however, you will then save the 3% additional Stamp Duty on your new home. We will be happy to help you to do the number crunching to see whether the SDLT saving on your new home would more than cover the SDLT that would need to be paid by the company, but you should not make your decision based on that calculation alone.
There are other advantages of having your BTL property in a company. The first is that Section 24 does not apply to companies. This means you will be able to offset 100% of your mortgage interest against the rental income.
If the interest rate that Barclays are offering on your new home mortgage is similar to the BTL mortgage they are offering, it might make sense to borrow more against the rental property and less against your new home. This is because you won’t get any tax relief on the mortgage interest on your home.
If the interest rate on the Buy to Let mortgage is higher than the interest rate on your new home mortgage then a bit of number crunching will be required to calculate the best outcome when also factoring in tax.
Another advantage of selling your existing home to a Limited Company is that the element of the sale and purchase consideration which isn’t subject to a mortgage can be regarded as a Directors/Shareholders loan. One of the additional benefits of structuring the deal that way is that you will then be in a position to retain your rental profits in your company at a much lower corporation tax rate than the 45% rate of tax you would pay if the property was owned in your own names. Furthermore, the company can use that retained profit to repay your Directors/Shareholders loans to you and the repayment of that money would be tax free for you.
Last but not certainly not least is inheritance tax, which may well be important for you if you and your wife plan to leave a legacy for your loved ones.
By structuring your Buy to Let transaction as per our suggestions above, the value of your shares in the company will be negligible at the beginning. However, as your Buy to Let property appreciates in value, so will the value of your shares in the company. If you do nothing about this, your loved ones may well be subjected to 40% inheritance tax on that capital appreciation when they eventually inherit those shares. For example, if we assume that your Buy to Let property is worth say £300,000 on day one, it might quadruple in value by the time you die. That’s £900,000 of growth which could be subjected to a whopping £360,000 of inheritance tax! However, there is a way you can solve that problem for your beneficiaries by doing the right things now.
With professional legal advice, it is possible to amend the Memorandum and Articles of Association of the Company to dictate which classes of shares accumulate any such growth. Naturally, this would also require your company to have multiple share classes too. If you give those “growth shares” away whilst they are worth very little, then any growth can accrue outside of your estate for inheritance tax purposes.
The growth shares could be gifted to one or any number of people, but for the purpose of flexibility we suggest you gift them to a Discretionary Trust. That way, you set the rules and you can also amend them during your lifetime. For example, you may change your mind over who you want to benefit from the trust over your lifetime.
As you may have gathered, the inheritance tax planning we have described above is extremely complex. You will probably need a professionally drafted Shareholders Agreement too. This sort of planning should never be DIY and Financial Advisers and Accountants can’t help either, because the work required involves “reserved legal activities”. There is also a huge amount of anti-avoidance legislation you could fall foul of, such as GAAR, DOTAS and the settlement Legislation, which is why insured professional advice from a fully trained, practicing, regulated, experienced and insured Barrister-At-Law is so vital.
As an indication of the legal costs to implement all of the above, you would need to budget around £20,000 – of which circa 75% would be for the inheritance tax planning. You will never see the benefit of that of course, but it will eventually save your loved one’s a fortune. That’s why we used the words ‘the right thing to do’. The other thing to bear in mind is that if you get a taste for being a landlord, the structure we have recommended above is sufficiently flexible to accommodate any number of additional rental properties you acquire. You only need one structure like this, regardless of how many properties you own.
The above is just an initial overview based on the information you have shared with us. It must not be regarded as professional advice at this stage, but we hope you have found it helpful.
For anybody reading this who already owns a rental property business, it’s never too late to start your planning. We have helped several very established landlords to restructure their rental property businesses in this way. Whilst the inheritance tax structure we have described will not solve the problem for assets you have already accumulated, we can stop the clock so that any future growth accrues outside your estate.