What impact has the recent Autumn Statement and the rise in interest rates had on property landlords and the incorporation of their property portfolios?
Be under no illusions we are in difficult times, with the economy struggling to recover from Brexit and Covid-19 and the cost of borrowing going through the roof.
Our fourth Chancellor this year, in his Autumn Statement last week is trying to steady the ship but what does this mean for the private property landlord when he/she is being faced with decisions over whether or not to continue renting his/her property or to sell up to simply stay afloat?
At Charterhouse we cannot provide ‘investment advice’ but we can hopefully shed some light on the various tax changes and the impact of taxation on your property business.
Most of what was in the Autumn Statement had been leaked ahead of the day, but nobody was sure of the extent to which things would be changed until the day arrived and the proposed changes were publicly announced.
For private property landlords one of the major changes is to the Capital Gains Tax (CGT) annual exemption. Currently this is set at £12,300 per person per annum, however from 6 April 2023 this will be more than halved to £6,000 and from 6 April 2024 halved yet again to £3,000. This means any taxable gain with a 28% tax rate will suffer an increased CGT charge of £1,764 (28% on £12300 – £6000) after 6 April 2023 and £2,604 (28% on £12300 – £3000) after 6 April 2024.
The reduction in the CGT annual exemption brings the taxation of gains on individuals closer in line with the taxation of corporate entities who do not benefit from an annual exemption. Any gain from the disposal of a property held in a limited company will be taxed at Corporation Tax (CT) rates not CGT rates currently a difference of 9% (19% as a corporate and 28% as an individual) although this will reduce if the profits on a sale of the property are significant enough to push the company into the higher rate of 25% corporation tax when the new CT rules come into force from 1 April 2023.
Of course, as many people do already hold property in a special purpose vehicle (SPV) limited company they can, rather than sell the property, sell the shares of the company that owns the property and this will save 8% CGT and in addition there will be no Stamp Duty Land Tax for the buyer although there will be a much lower Stamp Duty (0.5%) that will be payable.
As we are all aware, interest rates and therefore the cost of borrowing have risen significantly over recent months. An individual private landlord impacted by the s.24 loan interest restrictions with increased interest costs will not receive any extra relief beyond the basic rate of tax even though in real terms their business is more likely to suffer a loss.
If your property business was operated in a company, the business would obtain CT relief at the prevailing rates on the loan interest paid meaning that you will pay CT on a smaller slice of your business profits. By running your business through a company, you will also enjoy the benefit of paying tax on the rental profit at the lower corporate rates of tax as opposed to personal rates of tax which can mean you will be subjected to effective rates of tax higher than 60%.
Operating your property portfolio business through a limited company does not necessarily mean paying tax twice, if structured correctly, an incorporation of the rental business will result in a significant tax advantage. Of course, amongst other things you can still take a salary, dividends (although the tax-free amount of dividends will reduce to £1000 from 6 April 2023 and then down to £500 from 6 April 2024) and make corporate pension contributions, with good planning a business operated through a company can leave you with so much more in your pocket.
Let us now have a look at a simple comparison exercise to show the corporation tax/income tax benefit of running your property business through a limited company:
A property was purchased for £350,000 with a mortgage of £250,000, annual rental income of £20,000, annual rental expenses of £2,000 and a rate of interest at 5.5% for personal borrowing and say 6% for corporate borrowing.
|Personal ownership||Corporate ownership|
|Gross Annual Rental Income||£20,000||£20,000|
|Annual Rental Expenses||£2,000||£2,000|
|Annual Rental Profit||£18,000||£18,000|
|Annual Mortgage Interest||£13,750||£15,000|
|Annual Rental Profit before Tax||£4,250||£3,000|
|Income Tax @ 40%||£7,200|
|Basic Rate Tax Credit @ 20%||-£2,750|
|Corporation Tax @ 19%||£570|
|Annual Rental Profit after Tax||-£200||£2,430|
So, as you can see the savings are significant due to the extra tax savings you get by virtue of how interest payments are taxed on an individual as opposed to a corporate.
Whether you already run a rental business or are considering starting a rental business/investment, operating your business through a limited company can in many instances leave you financially better off, not only are there potential tax savings but you also benefit from limited liability.
If you are interested in discussing your own property business taxation or are interested in ways to incorporate your rental business do get in touch with David White at Charterhouse firstname.lastname@example.org or on his mobile 07831 250149.