Limited Companies – BICTs

A taxing time for landlords

When the phased reduction of income tax relief was introduced in 2017, it looked like many private buy to let landlords would lose out financially, facing big hikes in their tax liability in the years ahead. With mortgage interest tax relief now eroded to the 20% base rate, together with changes such as Stamp Duty Land Tax surcharges, the removal of ‘wear and tear’ allowance and higher rates of Capital Gains Tax, many landlords are considering how they can make their rental portfolio more tax efficient.

One way to achieve this, without becoming a limited company or partnership, is through a structure known as a Beneficial Interest Company Trust, an approach that has become increasingly popular over the last few years. However, some view it as a controversial option so careful consideration should be given before going down this route.

What is a Beneficial Interest Company Trust?

A Beneficial Interest Company Trust allows a landlord to have a personal mortgage on a rental property but from a tax perspective, still treat the property as if it is part of a company. This means that rental income paid to an individual is transferred to the company and accessed through a combination of salary and dividends. As a result, the landlord benefits from full tax relief on mortgage interest and access to lower rates of mortgage finance.

However, although Beneficial Interest Company Trusts have been around for many years as a perfectly legal structure, it may have an impact on your ability to secure a mortgage going forwards. This is because some lenders, brokers and tax advisers are concerned it could fall foul of HMRC tax avoidance legislation because changes made by landlords since 2017 could be seen as a more of a desire to minimise their tax liability rather than being commercially motivated.

Indeed, it’s possible that in the future HMRC will classify arrangements like Beneficial Interest Company Trusts as a tax avoidance measure and pursue any outstanding tax liabilities retrospectively. This could leave many landlords facing a large tax bill they are unable to cover, highlighting the importance of considering the longer-term risks.

Other tax considerations

It’s also worth remembering that other taxes may apply when transferring from private ownership to a company structure, whether moving to a Limited Company, Partnership or Beneficial Interest Company Trust arrangement, such as:

• Stamp Duty Land Tax (SDLT) – this applies to the transfer of residential property from an individual to a limited company
• Capital Gains Tax (CGT) – this will apply if the value of the property has increased since it was purchased
• Annual Tax on Enveloped Dwellings (ATED) – this tax will apply to companies that own residential property valued at more than £500,000

Always take advice

To incorporate properties into a company structure, a landlord must be able to justify to HMRC that it is a legitimate business. This means demonstrating that at least 20 hours a week are spent managing the buy to let portfolio and business. It’s important that any transfer of rent within a Beneficial Interest Company Trust arrangement is transparent and must be declared to HMRC. It’s a complicated area and we strongly recommend seeking professional tax advice.

Take time to speak to a qualified tax adviser who will discuss the most tax efficient approach for your business and ensure adherence to HMRC rules as well as talk you through the short and long-term financial implications.

Also discuss your plans with an independent mortgage broker such as Vincent Burch Mortgage Services, who can assess your finance options and help you find the right mortgage for your property portfolio.

The Vincent Burch team

Our friendly, knowledgeable team share many years of Limited Company buy to let mortgage experience and as a whole-of-market broker, we have access to specialist lenders not available on the high street. Whether you’re looking to mortgage or remortgage your property investments, we can offer advice on the best course of action and find the most appropriate finance solution.

To discuss getting a buy-to-let mortgage call 01603 851534 or email [email protected].