The Owner-Managed Business Property Tax Trap
It's easy to fall into ...
POSTED BY HELEN BEAUMONT ON 12/10/2018 @ 8:00AM
Do you have a limited company and remunerate yourself by taking a small salary and dividends? If you own buy-to-let properties, you may soon find that you fall into this property tax trap ...
This is a complicated and confusing property tax trap. Don't fall into it!
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The legislation has been with us for 18 months now and we all know that the cost to private landlords is significant. However, did you know that there are a range of scenarios where mortgage interest tax relief will not be able to be claimed.
To understand this property tax trap, the regime is being introduced in four equal phases from 2017/18 which a little over a year away now:
Disallow the mortgage interest claimed in progressively larger 25% proportions, from 2017/18 through to 2020/21 and onwards
Grant a tax credit that is at first equal to 20% of the relief disallowed in Step 1
There are numerous conditions to Step 2.
Remember that only certain income counts. The new rules permit the 20% tax credit only to the extent that sufficient tax has been paid on the right kinds of income.
Tax on dividends and savings income do not count, nor does any property income that falls within the taxpayer's tax-free personal allowance.
Fred who is a basic rate taxpayer:
Fred works full-time and has a fixed income of £35,000 per annum. He has a single buy-to-let property which gives him £3,000 of net rental income, after paying £3,000 of mortgage interest.
In this example, Fred stayed in the basic rate tax threshold, so any tax due on disallowed mortgage interest has been balanced by the corresponding 20% tax credit.
Jane is a company director and shareholder:
She takes a salary of around £8,500 per annum topped up with £30,000 of dividend income. On top of that, Jane has a mortgaged residential property which she lets out (the figures are the same as with Fred).
The disallowed interest is £3,000, but Jane gets just £2,500 at 20% in tax credit as this is the amount of rental income that is actually subject to tax. This assumes a personal allowance in 2020/21 of £12,000.
As you can see from the examples above, employees will generally be ok, but for the owner-manager, it is possible to lose out because of the way the 20% tax credit is calculated.
The legislation around interest disallowance and the associated tax credit is incredibly complicated with many knock-on effects and hidden pitfalls. If you do own buy-to-let property then I strongly recommend a tax review soon to ensure you don't lose out.
"Would you like to know more?"
If you'd like to find out more about this complicated and confusing property tax trap then do give me a call on 01908 774323 or click here to ping me an email and let's see how I can help you.
Until next time ...
If you're looking to work with an expert tax advisor with a wide range of tax experience, do visit www.essendontax.co.uk to find out more about me and discover how I can help!
Helen brings the personal tax planning experience of the top 20 tax companies to Essendon. Formerly of MacIntyre Hudson (with 45 offices nationwide), Helen worked at Chancery for more than 10 years before joining Essendon as the personal tax specialist.
Tax Planning can make a considerable difference to your tax liability. Helen’s specialist knowledge in tax planning and experience ensures every opportunity to minimise your tax bill is utilised. By analysing your investments, income, profit and expenditures, Helen will provide strategic tax planning expertise that could offer significant savings, whilst delivering clear, honest advice and guidance.
When Helen is not at Essendon she spends time with her young son and likes going on long walks with the family dog.