I became a landlord eight years ago and have built a profitable portfolio of five properties in the Midlands.
They are in my name and I really don't want to turn them into a company. However, my agent seems to think that he should do it.
They all have mortgages with an average loan-to-value ratio of 82%. What should I do about changes in tax exemptions?
Leicester - Midlands landlords tend to generate better returns as property prices are lower
Sarah Davidson of This is Money says:Corporations are in. youThis is largely due to the past year, which saw several structural changes to the taxation of rental income, gains, and acquisitions.
Earlier this month, the phase-out of mortgage interest tax breaks for purchased-to-rental properties began. Over the next three years, this tax break will expire and be replaced by a 20% tax credit through 2020, greatly impacting many homeowners' profits.
Meanwhile, not only was a 3% stamp duty surcharge on the purchase of rental properties and second homes introduced last year, but the wear and tear allowance for homeowners was also removed.
You can find more information about these changes here.
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HOW THIS MONEY CAN HELP
The key to the limited partnership problem is changes in mortgage interest and the attrition tax allowance.
The mortgage rate change and attrition tax relief apply to homeowners who own rental properties and means they now pay income tax calculated on the income generated by those properties, not just the profit they make after paying the mortgage interest.
As a result, thousands of homeowners have seen their costs begin to rise, and mortgage brokers are looking for ways to mitigate the financial damage.
However, these changes do not apply to buy-to-let property owned by a limited liability company. Since these properties are considered a business, all expenses are tax deductible.
Owners can still receive income in the form of dividends and only pay taxes on them; In theory, they could significantly reduce their tax bills, but they must account for taxes on receipt of those dividends or any access to retained earnings in the business.
This is a VERY simplistic way of explaining the differences, however, the industry and media have embraced the buy-to-lease corporation as a miracle cure.
It's not. There are many considerations to make. Here are a few:
Chancellor Philip Hammond confirmed that dividend tax breaks will decrease in 2018
1. If you already own buy-to-let and want to transfer them to a limited liability company, activate a sale and repurchase which incurs capital gains tax, stamp duty plus surcharge, plus attorney, appraisal and mortgage.
2. Corporations have ongoing expenses, corporate income taxes and possibly business taxes, require official filing of annual accounts and appointment of directors. Board meetings must take place and accountability is assigned. This creates an additional layer of liability for homeowners who choose to go the limited liability company route.
3. Although some lenders set mortgage interest rates uniformly for private homeowners and limited liability company purchases, limited liability company interest rates are generally higher and incur higher fees.
4. The tax implications are complicated depending on if and how you earn other income. Each individual's personal tax liability will be different, so it is worth seeking independent tax advice.
5. Dividends are subject to a different tax system than earned income and recently came to the attention of the Chancellor, who suggested that the tax-free dividend would be reduced from £5,000 to £2,000 next year. This follows recent increases in the dividend tax rate. However, following the confirmation of snap parliamentary elections in June, this policy proposal was withdrawn from the Finance Law for the time being.read more here.
6. Buy to rent rules are not immutable and can change again in the future if the government so wishes.
Whatever you decide, it's a good idea to seek independent financial advice.miindependent tax advice. Mortgage brokers are qualified to find you the best mortgage, but that doesn't mean they're qualified to give you tax advice. You need an expert accountant for this.
Rob Bence is a homeowner and co-founder of The Property Hub investor forum. He comments on his situation:
Bence: The owners are very quick to see the buy-to-let business as an easy option.
In my opinion, you are right not to want to switch to a GmbH.
When former Chancellor George Osborne announced plans to cut tax breaks for homeowners in 2015, the limited liability company route was touted as a panacea.
In fact, thousands of homeowners have already chosen this route: Countrywide's latest figures show that a fifth of all rental properties are now owned by companies.
But I think many were quick to see this as the easier option.
The limited liability company route is not without its flaws. You'd have to pay capital gains tax on any capital growth, and even though you have an allowance, it's unlikely to cover that.
There is also stamp duty to consider. Effectively, you would have to buy the properties as a limited company for yourself as an individual, for which you would be liable for stamp duty, including the 3 per cent surcharge.
You would do all the administrative work to set up the company and manage your accounts. Also, while more limited liability company mortgages are entering the market, they tend to have higher interest rates than stand-alone mortgages.
The most important thing is to understand how your tax situation will change. Are you moving to a higher tax threshold or staying below it?
Now that homeowners are taxed on their income and not just their gains, many find themselves pushed into higher tax brackets. If that's the case, you need to reevaluate your portfolio.
Do your calculations. Once the full tax burden is in place (it's being phased in and won't be fully effective until 2020), will all your buy-to-let be profitable?
Consider selling properties that don't break even.
Look at all of your mortgages and make sure they are the best products available to you. Cash flow is more important now than ever, and looking at your mortgages is one way to improve it.
If you want to do a debt restructuring, contact the creditors who have made a transition arrangement. Due to new rules from the Bank of England's Prudential Regulation Authority, the criteria for mortgage lending are now stricter than ever.
Those rules mean lenders must undergo more rigorous stress tests and homeowners must show they can earn higher rents to access financing.
However, the PRA has allowed lenders to introduce transitional arrangements, which means that borrowers can restructure according to the criteria that were in place before the new rules went into effect.
That means you can get a mortgage with a lower rent coverage bill. Not all lenders take full advantage of this, but the Ipswich Building Society recently became the latest lender to do so.
However, it's worth noting that most buy-to-let lenders only lend up to 75% LTV. Utilization above 82 percent, like you, becomes difficult and expensive, since products with a higher LTV also have a higher rate.
Consider using your spouse to limit your taxes. This is not as Machiavellian as it seems. If your spouse doesn't work, it may be worth claiming your tax credit.
Finally, make sure you are aware of all tax-deductible expenses. For example, mortgage brokerage fees and lender locator fees are tax deductible, as are funds spent on repairs or maintenance.
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What is the advantage of putting a property in an LLC? ›
Avoiding personal liability
This is the major advantage of an LLC. You want the best option for limiting your personal liability should an unforeseen circumstance arise relating to your property. LLCs provide that protection.
In the state of Texas, landlords and investors who own multiple properties should definitely consider forming an LLC. In most cases, it offers a cost-effective way to protect your personal assets and simplify ownership.What are the tax consequences for transferring property to an LLC in California? ›
Generally speaking, transferring property into a single-member LLC that is a disregarded entity for tax purposes will have no tax consequences, although you should always check with your tax advisor. That's because the LLC is not considered a separate legal entity from its owner.Should I put my rental property into a limited company? ›
Benefits of a limited company
But if you are operating a substantial lettings business then the main benefit of using a limited company to hold your properties is the fact that you'll be paying corporation tax on profits rather than income tax. This is currently charged at 19% of profit for this tax year.
Chances are that you have already heard about using an LLC (limited liability company) for asset protection. By forming and operating an LLC properly, assets you place in the LLC are separated from your personal name. If a lawsuit happens, the judgement is limited to the assets within the LLC.