As we all finally settle into the full impact of Section 24, the recent government tax reshuffle has thrown another wrench into the work for rental owners (BTL).
While they are certainly not industry-wide of the aforementioned interest relief changes, the changes to Dividend Tax, Corporate Tax, and National Insurance (NI ) will impact many of our BTL owner customers.
Don’t worry, I’m not going to get into the nitty-gritty of the recent tax changes; I leave that to our esteemed fellow tax advisers. However, I think there are some key points that we as brokers need to be aware of.
For those of us in this industry before Section 24, we have noticed a marked increase in the number of owners investing through special purpose vehicle limited companies. A quick glance at our data shows that in the fourth quarter (Q4) of 2016, only 29% of BTL cases were transactions of limited companies.
It’s not that bad that anyone should consider selling
Compare that to Q2 2021 and 53% of BTL’s purchase and remortgage cases completed through a limited liability company structure.
While the investment structure of a limited liability company has many advantages, tax efficiency is usually the primary motivation for most owners. And so, with more and more owners using limited companies to invest in BTL property, it is likely that an increasing number of them will earn income, in part, from dividends. Therefore, the 1.25% dividend tax increase is likely to have a negative impact on owners who take more than the £ 2,000 dividend allowance per year.
However, while the government estimates that this change will not affect 60% of people with dividend income outside of Isas, I imagine it will impact many owners of limited companies who make most of the money. their dividend income.
Nonetheless, I don’t think there is any need to panic.
Of course, rental income from incorporated BTL buildings is subject to corporation tax. As announced in the budget in March, corporation tax changes from April 2023 for companies with profits over £ 50,000; those below this threshold (estimated at 1.5 million companies) will remain at the current level of 19%. Companies with profits between £ 50,000 and £ 250,000 will be subject to the marginal rate of 26.5%; and, for those over £ 250,000, a 25% corporation tax will apply.
If clients have concerns, firmly direct them to a professional tax advisor
Therefore, we expect that only owners with substantial real estate portfolios will experience an unfavorable change in their after-tax profits. And they should be reminded that, even after these changes take effect in 2023, the UK will still have one of the lowest corporate tax rates in the G7 countries. In Italy, corporation tax is 24%, while France and Canada are at 26.5%, the United States at 27%, Germany at 30% and Japan at 30.62% .
Also, the UK’s new rate is nowhere near the 28% that some of you may remember from 2010, or the 52% that our own CFO remembers from a long time ago (it doesn’t would not admit when).
Ultimately, the impact of these changes, combined with the NI / Health and Social Care Levy adjustment, on a homeowner will depend entirely on their individual tax situation. The changes are unlikely to change whether investing in a limited liability company will be less or more tax efficient than personal possession of BTL property for the majority of clients. And, god knows, it’s not that bad that anyone should consider selling. If clients have concerns, firmly direct them to a professional tax advisor!
If you’re still with me at this point, I’d like to briefly touch on the much more exciting issue of BTL mortgage rates.
Having worked with mortgages for more years than I want to admit, I have never seen BTL mortgage rates this low. Every week I think the race to the bottom of lenders has to be over, and yet someone somewhere finds a way to continue.
Even after these changes take effect in 2023, the UK will still have one of the lowest corporate tax rates in the G7 countries.
More interestingly, the spread between BTL interest rates of individuals and public limited companies has narrowed considerably; At the time of writing, we could guarantee rates for these from 2.59% to 75% loan-to-value ratio! However, I know that such good things cannot last forever and, with inflation as it is (3.2% for August), I have no doubts that the inevitable market correction is approaching.
I very much doubt we will see a sudden hike, but keep an eye out for lender rate charts as we get closer to fall.
Jeni Browne is Director of Business Development at Mortgages for Business