Maximising your returns when investing in property
PUBLISHED: 12:43 04 July 2016 | UPDATED: 12:43 04 July 2016
Gemma Brindley, director of property and construction in the Cheltenham office of national audit, tax and advisory firm Crowe Clark Whitehill, examines the issues facing property investors, big and small, in 2016.
Planning and preparation are the key to successful property investment and it has never been more important to map out the route you plan to take and consider all the factors that can enhance or detract from your investments.
In this article, we examine the issues facing the buy-to-let investor, whether considering this as an effective means of investing capital with the intention of owning one or two properties, or for the more committed buy-to-let investor, treating this as a full time business concern.
Buy-to-let has had some bad press recently but many still see property as an attractive investment at a time of low interest rates and volatile stock markets.
Landlords, on whatever scale, need to start the process with tailored advice from their tax and financial advisers.
At the top of the “To Do” list could be the decision whether to trade as an individual or as a limited company (incorporation) from day one.
The decision to operate through a limited company is not for everyone, and there are important tax changes this year that will affect landlords.
From April 2016, BTL landlords have to pay an extra three per cent Stamp Duty on property purchases.
Top rate taxpayers will be hit when the amount of tax relief they can deduct falls from 45 per cent to 20 per cent, but on the other hand, companies holding and investing in residential property pay a fixed rate of tax on their profits.
Existing landlords would effectively have to sell their property portfolio to the new company they have set up, which in most cases would incur Stamp Duty Land Tax (SDLT).
There may be savings to be made on mortgage relief but how long will these take to mitigate the 5-12 per cent SDLT you have paid?
If you cannot claim incorporation relief, then you may have to pay Capital Gains Tax.
Another issue is the Annual Tax on Enveloped Dwellings (ATED). This was aimed as part of a package of measures aimed at making it less attractive to hold high value UK residential property indirectly, for example through a company, in order to avoid or minimise taxes such as SDLT when you came to sell the property.
The move was principally aimed at the London market when first introduced – the taxable value threshold was set at £2 million or above – but since then the threshold for the application of ATED has dropped to £1 million from April 2015 and now £500,000 or above from April 2016.
The change brings a lot more properties into its net.
When considering whether to invest as an individual or as a company, it is important to understand the full implications of each and every different situation. In many cases you may find that it still works out better if you buy property to rent out in your own name.
It is more difficult for companies to obtain mortgages and these are subject to commercial rates, which already eats into any mortgage relief gains.
And although you may appear to have a higher profit from monthly rental income as a company does not pay the higher rates of tax, once you take into account dividends or CGT on liquidation then the private landlord option wins out over the limited company.
If you want to realise the company’s assets, then you either have to issue a dividend or opt to liquidate the company and pay CGT on the profits – on which you have already paid corporation tax. From April 2019, landlords will have to pay their CGT within 30 days of selling a property.
A limited company brings with it obligations and responsibilities such as a requirement to file the accounts and financial status of the investor’s entire property portfolio with Companies House each year. That will mean extra costs as a result of the preparation of those accounts, plus company tax and corporation tax calculations for HMRC.
However, there are significant advantages. Corporation tax is payable on trading profits at the rate of 20 per cent for 2015 to 2016, reducing down to 17 per cent from April 1, 2020, far lower than the higher income tax rates of 40 per cent and 45 per cent.
Residential property investment is no longer for the enthusiastic amateur seeking to augment or replace their pension in retirement. It needs specialist advice and careful consideration following these changes.