There have been a number of changes recently to tax for the purchase of a second residential property and expense claims against rental income for landlords. There are a number of considerations to be made when looking at these changes.
What Has Changed?
Stamp Duty changes mean that if you purchase a second residential property, that is not your main residence, you will pay an additional rate of 3% on top of the normal rates of stamp duty. You may be eligible for a refund of the additional rate of Stamp Duty paid, if you sell your previous main residence within 36 months.
Another consideration is with regards to a change to expense claims against rental income. A group of landlords lost their court case in October 2016, which means that from April 2017, there will be new rules on how mortgage interest relief is calculated. This will apply to individuals that receive rental income from properties of which a mortgage or form of finance has been taken out to purchase the property.
Using a Company
There are a number of articles online that suggest that transferring property to a company can help to save tax, if the mortgage interest relief changes will lead to a higher personal tax liability. A company is currently still entitled to claim all mortgage interest costs against rental income, but we would always recommend speaking to us before deciding to transfer a property, as there can be a number of potential tax implications to consider.
When you transfer a property from personal ownership or beneficial ownership (through a deed of trust) to a related company, it will trigger a capital gain or loss. The gain or loss is calculated at the market value of the property at the time it is transferred to the company, less the cost of purchase and any enhancement expenditure on the property. This should be considered before you decide to do this. Any gain in the value of the property up to the date it is transferred is still tied up in the property, which could lead to a potential tax liability on transfer before any gains on the final sale have been realised.
One other consideration is stamp duty, which may be due if the property is transferred to a company that is controlled by the same individuals that owned the property before the transfer took place.
It may still be beneficial to use a company, but it is always best to seek advice before making any decisions. There are some reliefs that could potentially be available.
We can advise on the best solutions with property investments and whether it will be beneficial to purchase property with a company, or transfer property to a company.
Please feel free to contact us for a free initial consultation.