With the advent of a 'new era' upon us in the form of new tax changes being introduced this month, I thought it would be worth reflecting on exactly what we can all do if we have outstanding mortgages on our current (and future) properties. Like it or not, we now find ourselves having to make some important choices about how we move forward with our portfolios, whether or not we intend to build upon them, or not.
If you, like many thousands of other landlords across the country (myself included!) have large amounts of mortgages outstanding, then we are all going to have to decide the best course of action to protect ourselves against the relentless agenda the Government seems to have on the Private Rented Sector.
Notwithstanding the additional 3% surcharge on Stamp Duty Land Tax which has just been introduced on the 1st April (I wish it had all been a nasty April Fool's joke, but it clearly wasn't!), we are now also only a year away from the start of the reduction in Mortgage Interest Tax Relief for individual landlords.
Now is the time to start planning ahead and considering the options for how best to structure your business from here. Below are some ideas to help you consider your options and help you work out that best case scenario for you.
Please note, I am making these suggestions as one landlord to another, and it is highly advisable for you to speak with your financial/mortgage advisor and/or accountant before making any drastic changes to your current portfolio, however large or small...
Selling - the idea of selling up some or all of your properties is really quite drastic, however, in certain situations this may make sense. Depending on the level of capital gains you have made, you have the option of emigrating from the UK(!). If you live abroad for 5 years or more, then any capital gain you have made on your properties up until 5th April 2015 would be exempt from CGT (Capital Gains Tax). There are certain conditions around this option, so please check for your personal circumstances.
Tax Regime - if the new tax regime is going to eat significantly into your yearly profits from 2020 and emigration is not an option, then the idea of selling off one property per year may help to reduce this tax implication and enable you to make the most of your CGA (Capital Gains Allowance), depending on how much profit you have made since you bought.
Downsizing - downsizing your portfolio like this, making the most of your CGA each year, and then perhaps buying further properties within a Limited Company could be an interesting way to go.
Refinancing - if you have mortgages outstanding on your property/ies, have you looked into the option of reducing your mortgage interest? If you are on a really good tracker rate, (left over from the aftermath of the 'credit crunch') then chances are you won't find such good deals again right now. If, however, you have bought in more recent times, then make sure you shop around when your fixed term mortgage deal comes up for renewal to ensure you are paying as little interest as possible.
Transferring - transfer of certain properties into a spouse's name or adding a spouse/partner to the mortgage - this could be an interesting option if your partner pays a lower rate of tax than you and as long as it won't push their income into the higher rate of tax.
Incorporation - the idea of purchasing (additional) properties into a Limited Company structure is becoming more and more appealing to BTL investors. You still have the advantage of being able to deduct all of your mortgage interest and the benefits include the ability to plan better for IHT purposes and adding new shareholders to the company whenever you wish. Other advantages include limited liability, ability to make pension contributions and less tax to pay within the company from 2020. Disadvantages include possible higher interest charges and less options for raising finance along with no CGA.
Consequences of Incorporation from Existing Portfolio - if you are looking to move your existing portfolio into a Limited Company, then, like any other regular 'sale', you will incur CGT. On an existing portfolio, this could be significant and therefore not practical. You will also have Stamp Duty, refinancing and accountancy costs to pay when incorporating./
S162 Incorporation Relief - there may be a possibility of you being able to use the this relief if your portfolio warrants it and you spend 20 or more hours per week running your business. Please check with a specialist tax advisor on this, as the net result could be the ability to convert equity in your properties into shares within the company structure. The value of these shares could be offset against the capital gain using the above relief. There may be a possibility that if equity within the property portfolio is greater than the capital gain, then by using the S162 incorporation relief, there would be no CGT to pay. Beware, this could be a costly option to set up, however, worth investigating if you have a sizeable portfolio.
After all this, the good news is... ...that these changes will also create opportunities for people who are willing to look past the challenges and see that there is still a way to ensure that this business is viable. Where every cloud appears, there is always a silver lining!
To see how the new tax changes may affect you, you can request your copy of my handy "Simple Tax Structure Example Regarding Changes In Mortgage Interest Relief to 2020" document, please email firstname.lastname@example.org and type in 'Yes please Hazel!' in the subject line to request. :-)
To continued, profitable property portfolios! Hazel Hazel de Kloe Property Investor | Property Mentor | Speaker | Author The contents of this article are for educational purposes only and we make no recommendation of any particular property purchase. The price of property can decrease as well as increase and you make any investments in property at your own risk. Why Property Works 2016 | www.whypropertyworks.co.uk