With the governments planned Restriction on Finance Cost Relief for Individual Landlords – many property owners are considering moving some- or all of their portfolio into a Limited Company. As a limited company, the property owner would then be able to deduct the entire finance cost as business expense. If the landlord considers themselves to be running a property business- in other words spending more than 20 hours a week running the business (or employing someone else to run the business)- they can transfer the properties across by simply by converting the business to company status.

When converting a business to company status Section 162 Incorporation may allow you to avoid the requirement to pay Capital Gains Tax. When the new business is set up any equity in the properties transferred across becomes shares in the new company and can be offset against any capital gain. As long as the equity in the properties exceeds any capital gain there should be no Capital Gains Tax payable.

In addition Land and Property Transaction Tax (LPTT) can also be reduced or even avoided if the properties are transferred from a partnership (e.g. husband & wife) into a Limited Company.

From April 2017 the government will restrict the amount of Income Tax relief landlords can get on residential property finance costs to the basic rate of tax. The government will introduce this change gradually from April 2017 over 4 years.

This means that in the next 4 years landlords that are currently paying higher rate tax will lose 50% of the tax relief they currently receive on their mortgage interest payments.

By the method of calculation that HMRC are planning to uses it will also mean that many landlords will become higher rate tax payers and lose a proportion of the relief they currently obtain.

https://www.gov.uk/government/publications/restricting-finance-cost-relief-for-individual-landlords

In addition the government have created a new Land and Property Transaction Tax (LPTT) of 3% for individuals purchasing an additional residential property.

If landlords do nothing many of them will receive ever increasing tax bills over the next four years.

Eg- a higher rate tax payer with one rental property receiving £800 rent and monthly mortgage interest payments of £400 will be taxed an extra £960 per year. That figure is multiplied by the number of properties they own.

Landlords who have high mortgage balances in relation to their property values will be proportionately worst hit. Some will end up being taxed more than their net profit.

To avoid this many landlords are planning to

1) Sell some or all of their properties. This requires carefully planning to avoid high capital gains charges.

2) Transfer their portfolio into a limited company. If done properly this could potentially reduce the landlord’s tax liability considerably. There are many routes that can be used that would help the landlord to avoid Land and Property Transaction Tax on the transfer and avoid paying high levels of tax on the rents received thereafter.