By Jo White
Tax Consultant, Spofforths
With recent changes in tax rules for individuals owning residential property, it isn’t surprising that market surveys by specialist mortgages brokers are seeing a rise in corporate mortgages.
The main change that will impact upon ownership of residential property lets relates to the tax relief you will be able to claim on finance costs from April 2017. The basic concept behind the change is that you can only claim basic rate tax relief on interest costs, resulting in a number of individuals becoming higher rate tax payers when they weren’t previously.
This proposed change has meant that many landlords are considering whether or not a company is a better structure through which to own residential property.
A company will continue to be able to benefit from full tax relief for its mortgage interest costs. The current Corporation Tax rate for a company is 20 per cent. This was already set to reduce to 17 per cent by 2020-21 however there are now indications the rate could fall to 15 per cent.
Comparing the two; the level of tax relief for a company compared to an individual will therefore be similar, if not less, but the overall tax position of a company will result in more profits being available for distribution.
In addition, due to the way a company is structured, individual shareholders can manage their tax position more efficiently. Instead of being taxed on the profits generated by their property portfolio, irrespective of the cash drawings they take, individual directors and shareholders will be able to take the optimum dividend and salary combination making the most of their allowances. Additionally, family members may also be involved in the company, whether actively or from an investment perspective, which allows money to be extracted at the lowest tax rate possible across the family.
Transferring an existing portfolio into a company isn’t without tax and financial cost. Companies are not therefore always a suitable option and a cost benefit analysis is recommended as part of seeking professional advice to see if it is the correct option for you.
Spofforths is the trading name of Kreston Reeves LLP