Roger Harding Tax Director
Buy to Let – Under Siege & The Race to Incorporate
“The landlord is maintained in idleness and luxury by the labour of his tenants” – Adam Smith
Whilst this may be one opinion, private landlords can certainly be forgiven for thinking it is a view held by George Osborne following his recent tax increases for the buy to let sector. The increase to Stamp Duty Land Tax (SDLT), coupled with restrictions on tax relief for finance charges and the removal of the wear and tear allowance will certainly leave many private landlords feeling under siege.
Polls suggest that more than half of private landlords have no plans to add to their portfolios after the SDLT changes take effect in April 2016 and also feel property values will diminish as a result. Landlords who are highly leveraged face the very real prospect of a double whammy – increased income tax and negative equity. Any increase to interest rates, which has also been mooted, could be sufficient to push many property businesses over the edge.
Most of the tax increases will take effect from April 2016 so many landlords should be reviewing their portfolios and making plans to mitigate the effects if possible. As the restrictions to interest relief will not affect companies and it is anticipated the SDLT increase will also not apply to them, there is likely to be a rush to incorporate existing property businesses before 1 April next year. The tax consequences of such a move should not be overlooked.
First, transferring the properties to a company will be a disposal for Capital Gains Tax (CGT), the deemed proceeds being the current market value. It is possible for property businesses to defer any gains following the case of Elizabeth Moyne Ramsey v HMRC in 2013, although this is not guaranteed. Second, even if CGT can be deferred, a charge to SDLT arises based on the market value at the time of transfer. This is usually enough to deter the smaller investor from incorporation, as the cost may take a long time to recoup through the lower company tax regime.
Some landlords may still take the view that the SDLT cost is a price worth paying to mitigate the long term effects of the forthcoming tax increases. There is then the difficulty of extracting profits from the new company tax efficiently.
The effect on current finance arrangements should not be overlooked either. The buy to let market has recently been reviewed by the Bank of England who have raised concerns that buy to let mortgage lending has increased by 10% in the first 9 months of this year. Lenders are therefore under pressure to increase their capital cushion and may not be prepared to lend to newly incorporated property companies on the same terms that existed prior to incorporation.
All in all property investors currently face significant challenges and a relatively short period in which to take action. Sound advice on all aspects of their property business should be sought at the earliest opportunity.