Why Shifting Your Buy-To-Lets Into A Limited Company Could Be The Road To Disaster
Landlords thinking of shifting personally owned property into companies to avoid imminent new tax burdens are growing in number. But many are forgetting to examine whether, in reality, this option stacks up. While taking such measures can work in the right circumstances, reshuffling the portfolio pack as a knee jerk reaction to section 24 could finish up being more expensive than sticking and holding, or even folding.
To begin with selling and buying a property, or batch of properties, incurs costs at both ends of the transaction. And with the additional 3% stamp duty payable on every asset at exchange, for many accidental or inexperienced landlords this sort of non-negotiable upfront payment could prove crippling. In addition, because a property sale is, from an accounting perspective, equivalent to a disposal, any capital gains that have been made while the property has been personally owned, or owned within a partnership, will attract capital gains tax.
The pain within the gain
And on the subject of capital gains tax, it’s another area that less seasoned investors don’t necessarily consider when taking on buy-to-let. In his last (and it was his last) budget, George Osborne delivered a staggering blow to landlords by excluding them from his generous CGT discounts. While basic rate businesses enjoyed a cut from 18% to 10%, and higher rate taxpayers from 28% to 20%, investor landlords were frozen out of the loop.
So, let’s look at it again—there’s the 3% stamp duty increase to pay on any transferred properties, plus the fact that CGT remains unchanged for landlords. Then, as discussed in previous newsletters, there’s the abolition of the automatic 10% tax break on wear and tear to consider. There are also solicitor’s fees to be paid, there may be mortgage redemption penalties to settle, and all of this is based on the assumption that a limited company mortgage can even be secured before the properties are transferred, something that certainly isn’t a given.
But on the plus side, with a limited company, mortgage interest can be entirely offset, something that will soon be seen by private landlords, once their mortgage interest tax tapers to zero, as a genuine luxury. Then, in the limited company world, there’s the far lower 18% corporation tax to pay, which is less than half of the higher income tax bracket, which many private landlords will find themselves being gently but firmly shoehorned into. And then, for landlords wanting to get their money out of the limited company and into their pockets as spending money, there will still be income or dividend tax to pay. That’s right folks—the government’s top shelf accountants have looked at this from every angle and worked hard to close up each and every loophole. And it looks as if they’ve done a pretty good job of it.
On balance, then, for many landlords becoming limited may still seem like the best option. Until one considers that, all benefits aside, the costs of incorporation outlined above aren’t the only costs limited property companies incur—that there’s something else lurking deep within in the cobwebbed cellar that’s been consistently overlooked.
Maligned, despised, ATED—yes it’s yet another tax!
ATED stands for Annual Tax on Enveloped Dwellings, payable each year on properties held in a limited company. Landlords thinking of incorporating their residential bricks and mortar assets will find it even more disheartening to learn that, prior to 1 April 2016, ATED only applied to properties of £1million or more. In the last tax year, however, the threshold was lowered, as in halved, to £500,000. This has pulled many more properties, and therefore landlords, out of a once sheltered area and dropped them headfirst into the taxable mix.
To the hilt and beyond
So how does ATED work? Basically, the same way as most other taxes: the more properties are worth, the more tax landlords have to pay. Valuations of between £500,000 and £1million currently attract £3,500 a year, but this skyrockets to £218,000 a year for properties and portfolios of £20million and over. With many more residential homes valued at £500,000 and above, this is an additional annual expense that landlords should factor into their projected accounts before even thinking about going limited.
Because—and here’s the rub—what’s to say the charges won’t go up…and up…and up! Call it the helium balloon tax. And what’s to say that private landlords incorporating a £1million property portfolio won’t, on a whim of the new Chancellor, see their annual payments increase from £3,500 to £10,000? Or that a single property valuation goes up from £1million to £1.1million instantly doubling the tax payable?
Check the figures
Comparing the chargeable amounts for the period 1 April 2014 to 31 March 2015, with the chargeable amounts for the period 1 April 2015 to 31 March 2016, it’s worth noting that in the highest ATED bracket (£20million or more), there was a hike on the annual amount payable; it was an eye-watering £74,450. So, should Phillip Hammond spot a trend of private landlords incorporating privately owned buy-to-let properties to circumvent punitive tax changes, there’s nothing to say that he won’t ambush them again, only using ATED as a vehicle.
Like the sword of Damocles, the question hovers high and holds—should private landlords envelop their privately held dwellings in a limited company or not? It’s difficult to say. But there’s a strong argument emerging that it’s all becoming too much of a splitting bureaucratic headache in a landscape fraught with rising costs and increasing uncertainty. And there are always other options.
Intriguingly, if you look at the Government’s ATED website page, hotels, which are not classed as dwellings, are exempt from ATED, as are quite a few other bricks and mortar classes. And, at Shepherd Cox, we think this is something seriously worth investigating. For more information on ATED, click here.