As a result of Chancellor George Osborne’s recently-announced adjustments to tax relief provisions on buy-to-let mortgage loans, landlords can only expect to claim against interest payments at a 20% rate, rather than their own marginal rate. For some landlords in the higher income range, that rate may have previously reached upwards of 45%. This represents a substantial change to which property rental investors must react if they wish to safeguard their profits says leadership speakers.
How Has the Landscape Changed?
Though the anticipated changes will not take effect immediately and will be the subject of a three-year phase in between the years of 2017 and 2020, it is important for landlords to plan their strategies now in order to halt losses they might otherwise prevent.
Investors must start the planning process now in terms of reviewing their portfolio budgets. They must also consider changing their business structures in a way which could perhaps mitigate the impact of the tax relief cuts on the horizon.
Is a Limited Company Structure the Answer?
A potential option for those concerned about the effects of these cuts is that of establishing a limited company. It is important to note that the tax relief cuts are aimed at those with property portfolios, though they do not have any effect on limited companies. Clearly, establishing this type of structure for a property investment portfolio makes good sense for many. In fact, there may be other benefits to come in the near future for those deciding to take this type of action.
Tax Cuts for Corporations
Though the Chancellor’s announcement of tax relief cuts was a jolt to many, he also announced a reduction in the corporation tax slated to begin in 2017. By 2020, the rate is scheduled to go from a high of 20% down to 18%, something many will find quite appealing.
As a result, forming a limited company may be the ideal option for landlords. Such a move will place portfolios outside the reach of the tax relief cuts, while also placing them in a much more advantageous structure in a general sense.
Limited Company Fundamentals
It is important for everyone to understand that limited companies are not simply the province of those with massive portfolios. The structure is available even to those with just a single property.
Limited companies are taxed only on the profits generated by the business, or in this context, the profits produced by one or more investment properties. In light of the lowering of corporate tax rates as well as the cut to tax relief once 2020 rolls around, it may just be that an investor’s after-tax profits can be much greater if the limited company structure is chosen. The Telegraph’s Nicole Blakemore has reported that shifting organisational structure in this way is likely to be the sound option for landlords interested in holding on to greater profits and also setting the stage for greater future growth.
Industry observers are coming to realise that given recent budgetary developments, buy-to-let investors and landlords everywhere ought to be considering the significant upside to shifting their endeavours to limited company structures. Time will tell whether this advice will be widely heeded and a sea change does in fact occur.
Noted Chartered Accountants from Blick Rothenberg believe that shifting to limited company structuring is a trend that is, in fact, likely to take hold, given the serious risk of profit losses that would otherwise be sustained by investors who do not take action in response to Chancellor Osborne’s summer budget announcements.
