This is a very popular subject within the buy-to-let community currently so we decided to have a deeper look at what can be done. It is likely accountants are going to advise to transfer property assets into a newly formed company. The main tax benefit of this action is that rental profits are taxed at the corporation rate of 20%. The government recently announced the good news that this rate will reduce to 19% in April 2017 and then to 18% in April 2020. Landlords will be able to take profits by the way of dividends which will make income very tax efficient. From April next year the first £5,000 of annual dividend income will be exempt from tax. Above this amount basic rate tax payers will pay 7.5% and higher rate tax payers 32.5%. Example case study For this example we will assume the client is a higher rate tax payer (40%) Gross annual rental income £50,000 Pays £20,000 interest on the mortgages and has £10,000 other rental expenses. The total rental profit showing for this year will be £20,000 before tax. Assuming the year is 2020 when the full changes come into force the tax bill would be £12,000 giving £8,000 income only. If the properties were held in a registered company tax due would be £3,600 due to 18% corporation tax. This now leaves the company with a post-tax profit of £16,400 if this was paid to the landlord by way of a dividend the additional tax due would be £3,705. This gives a total tax due figure of £7,305. So if this route is followed the take home figure would be £12,695 showing £4,695 more. As we can see there are significant benefits in taking this action, we would always recommend seeking professional advice before you decided how you should proceed. Need any help? If you require any assistance with your next mortgage or wish to talk over a potential deal please do call one of our qualified advisers. We look forward to hearing from you.
