The government has announced tax reforms that will reduce the amount of tax relief available to Buy To Let Investors who pay tax as individuals rather than as a company. Under these changes investors will have to pay tax on their full rental income by 2020. This is net of other allowable expenses and does not include the cost of the buy to let mortgage interest, there will be a flat rate tax credit equal to 20% of their interest cost instead.
So for those higher income taxpayers who were previously able to claim relief at the higher rate of 45%, the new set rate means they will face higher tax charges. Plus this credit will have to be reclaimed rather than deducted before tax is paid, further impacting the investor’s cash flow.
The impact of these changes has led to a rush amongst property investors to form new limited companies as portfolio owners switch to commercial property ownership rather than individual ownership. This then allows them to deal with tax via capital gains tax and a range of other costs rather than as an individual taxpayer.
However, it is essential you take professional advice before taking this plunge as it may not be correct for everyone.
Remember: Directors do not own a company – Shareholders do
This key point is being overlooked by many people as they do not realise that unless a Director is also a shareholder, they have no ownership rights. Directors are there to manage a company on behalf of the shareholders and even though they may appear to be “the boss”, they aren’t necessarily the owner.
So the structure of the company is essential to control of the business and you should be very careful before making children, joint venture partners or anyone else a shareholder as you may be inadvertently giving away your portfolio. Not only do shareholders own the business, they will own all of the assets too and have the right to do what they want with them.
Where these shareholders have 75% or more of the company’s shares, they can sack the Directors and vote to change any aspect of the company they wish to, including selling it.
Don’t be fooled by all the fuss buy to let mortgage providers make about having Director’s names on the paperwork and their personal guarantees to back up the loans. It is actually the shareholders they should be looking to sign the papers but they seldom do.
Please speak with us if you need assistance. We are buy to let property specialists as well as having an accountancy division that can help you decide if a company formation is right for you and if it is, the best way for it to be set-up.