The new tax rules taking effect in 2017/18 have been much discussed. But if you are a landlord and let out one or more properties, you will still be wondering what your new tax bill will be like after April next year, and should you be changing your tax strategy? As we’ll see, it’s likely that your tax bill will rise. However, the news is not all bad, and this article will help you to understand different tax strategies so that you can choose one for your circumstances.
What will the new tax bill look like and how will it compare to the current tax bill?
If you own four properties which earn a total annual rental income of £80,000, and you do have any employment income, the comparison of your tax for the current and next tax years will look like this.
| 2016/17 Tax year | 2017/18 Tax year | |
| Rental income | 80,000 | 80,000 |
| Mortgage interest deductible | 100% | 75% |
| Tax | 6,640 | 8,780 |
| Tax credit for remainder mortgage interest @20% | 0 | (1,320) |
| Total tax | 6,640 | 7,460 |
You will pay £820 more in tax for 2017/18 tax year, and for every year after that.
What can I do about it?
The next question you are probably asking is what can I do to mitigate the impact of the changes? Two feasible options are available to you and, luckily, both are relatively simple to implement.
- Set up a limited company and use it to buy properties in the future.
- If you have children over or approaching the age of 18, set up a bare trust for you children and move some of your properties into the trust.
The first option, operating through a limited company, is useful if you plan to buy more properties in future. As for your existing portfolio, you could move your other properties from you as an individual to your new limited company. However, you will need to consider the costs of doing so. And the list of costs can be long: stamp duty, capital gains tax, re-mortgaging costs, surveying and legal costs. Once you take off all those items you won’t gain much. The real benefits of setting up a limited company come when you make new purchases through it.
The key benefits of owning properties through a limited company are:
- You can use any capital gain made from the sale of one property for the purchase of the next property, and avoid paying income tax. This is particularly beneficial if your goal is to expand your portfolio.
- All mortgage interest is treated as company expense.
Points to keep in mind:
- You need to be a higher rate tax payer to enjoy the benefit.
- The admin costs will be higher. For example, you may need an accountant to file your corporation tax return.
The table below compares the pros and cons about buying a property as an individual versus through a limited company.
| As an individual | Through a limited company | |
| Property value appreciation | Capital gains tax @ 18% or 28% | Corporation tax @ 19% and 18% from 2020 |
| Mortgage interest deduction | Tapering down to zero by 2020/21 (75%, 50%, 25%, 0%) | 100% is treated as company expense |
| Tax credit on non-deductible mortgage interest | 20% | NA |
| Tax on profit | Income tax @ 20% or 40% | Corporation tax @ 19%, plus dividend tax @ 7.5% or @ 32.5% after the dividend allowance |
| Losses | Can be offset only against profit on properties | Losses can be offset against total company profits of the current or future years |
The second option for dealing with your tax bill is to set up a special type of trust – called a bare trust – with your children as beneficiaries. A bare trust is particularly efficient if your children are over eighteen and haven’t started working yet. Using a bare trust, two of your properties remain under your name but two are moved to the trust with your child or children as beneficiaries. They will be responsible for declaring the rental income from the two properties in the trust on their tax return(s). In essence, this arrangement spreads your income across two or more tax allowances. Using the same data as the example in the first table, the total tax liability for the £80,000 rental income will be reduced to £4,120 in the 2017/18 tax year.
| 2017/18 Tax year | 2017/18 Tax year with Trust | |
| Rental income | 80,000 | 80,000 |
| Mortgage interest deductible | 75% | 75% |
| Tax | 8,780 | 5,440 |
| Tax credit for remainder mortgage interest @20% | (1,320) | (1,320) |
| Total tax | 7,460 | 4,120 |
In summary, if your goal is to maximise net income and you happen to have children at eighteen years old, using a trust is a good option. If your goal is to expand your property portfolio, operating through a company might suit you better. And sometimes you can even combine the two options. Which is the best option for you – it depends on your circumstances. Speak to an accountant for specific advice.