Buy To Let Tax

December 16, 2016
Taryn Lee-Johnston

As the old saying goes, “If something seems too good to be true, chances are it probably is.”. Anyone tempted to try using creative financial transactions to reduce a tax bill should write out this sentence in big, capital letters using a thick, colourful pen and pin it somewhere clearly visible.

There are plenty of legally-acceptable ways of reducing the amount of tax you pay, ISAs are one obvious example of this. The Inland Revenue, however, understandably takes a dim view of people taking advantage of what could be called grey areas in tax law. It tends to pursue these rather vigorously and it does so on taxpayers’ money, while those it pursues generally have to fund their own legal bills. Hence, in very blunt terms, there is no real penalty on HMRC if it loses a case, whereas a taxpayer who loses a case faces a hefty legal bill in addition to the original tax bill. As well as this, when there is a dispute between HMRC and a taxpayer (be it a company or a private individual), the Inland Revenue can insist that any money it claims is owed be paid to it upfront on the understanding that it will be returned if the individual in question wins their case. In fact, under certain circumstances, HMRC can actually take money directly out of people’s bank accounts.

In very simple terms, therefore, HMRC have a lot of power and have had a lot of practice in using it. Hence, buy-to let-landlords (and indeed anybody else), should think very careful about engaging in any sort of activity, which could feasibly incur their displeasure. Buy-to-let landlords should also be aware of the fact that buy-to-let is a controversial topic from a political perspective. This could potentially mean that HMRC would be encouraged to pursue buy-to-let landlords for political reasons, even if, economically, there were far more compelling targets.

Taking all this into consideration suggests that buy-to-let landlords would be well advised to proceed with caution when it comes to the new “buy-to-let loophole” being publicised in the mainstream media. In this scheme, landlords set up a limited company to own their property. Instead of claiming mortgage tax relief, now at 20% for all buy-to-let landlords, including higher-rate tax payers, landlords pay corporation tax at 20% instead. In addition, they can offset reasonable running costs (including mortgage payments) against tax. There is, however, a price to be paid for all of this, which is that buy-to-let landlords have to go through the expense and hassle of setting up the company in the first place. Buy-to-let landlords may also find that it actually increases some of their expenses, particularly mortgage expenses since lenders will assess companies differently from private individuals. Some lenders may not even offer mortgages to companies. There is, however, an even more sophisticated version of this scheme in which landlords create a “beneficial interest company trust”. The trust holds the beneficial interest in the property on behalf of the company. All income from the property goes into the trust and hence is treated as corporate income (20% tax), but the landlord continues to own the title to the property. Hence there is no need to re-mortgage.

There is, however, a great need to remember that it is illegal for individuals to transfer personal assets into a company solely for the purpose of avoiding tax. In case of dispute the onus would be on the taxpayer to show that there was a commercial basis for their action (other than its tax benefits) rather than on HMRC to show that the taxpayer had deliberately acted to reduce their tax bill.