Unfortunately, Contractors with a buy to let property had a nasty surprise in the Summer Budget as Osborne undertook to ‘level the playing field’ in the housing market....
Under current rules income tax is only payable on the profit made by a landlord after offsetting the interest payments they’ve made towards their mortgage – effectively rendering the portion of your rental income which you use to cover the mortgage interest payments “tax free”. This means that Contractors are effectively benefiting from a tax relief of between 20% and 45% (depending on their marginal tax rate) on their mortgage interest payments.
The Chancellor dubbed this “a huge advantage” over residential mortgages where no such tax relief exists and has confirmed that from 2017 this effective tax relief will be gradually ratchetted down so that only a basic rate of income tax can be claimed. This means that a Contractor falling into the higher rate tax bracket with annual mortgage interest payments of £10,000 will need to pay a further £2,000 to HMRC – the difference between the basic rate of tax at 20% and the higher rate at 40%.
Tony Harris of IFA ContractorFinancials said “Many of our Contractors will be unaffected by the change in tax rules on buy to let interest as they have already taken advantage of a bespoke contractor buy to let solution which we arranged – this is open to all of our clients whether purchasing or planning to mitigate the tax on their existing buy to lets. These clients have purchased their investment properties through a new limited company which is a wholly owned subsidiary of their contracting company. As the limited company is ring fencing the property and its income, they won’t be caught by the new rules, saving them thousands of pounds from 2017 and allowing them to potentially undercut less savvy landlords who will inevitably need to up their rents to cover their additional tax levy.”
“What’s more, as many used the retained earnings in their contracting company as a deposit for their purchase this structure has also allowed them to fund the new buy to let without the need to draw down, and pay tax on, a dividend – as would be the case if they had purchased the property in their personal name – this initial saving is set to grow even further as a result of the punitive change in dividend tax.”
“Once purchased, the buy to let profit can be reduced by offsetting 100% of the mortgage interest and any allowable operating expenses. The profit you made attracts corporation tax and can be retained in the company for further property investments or to pay down the mortgage at a later date.”
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