March 25, 2024 10:51 am

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Nikka Sulton

Why Are So Many Landlords Selling Up? Many landlords are opting to sell their properties due to increased tax bills and high interest rates, making buy-to-let investments less lucrative. However, for those not yet ready to sell, there are strategies to manage tax liabilities and maintain profitability.


Everything you need to know about Section 24

Buy-to-let landlords face significant financial pressures due to rising tax bills and high interest rates, exacerbated by the implementation of Section 24. While selling properties may seem like a viable solution, landlords have alternative options to consider. Incorporating portfolios into corporate structures offers potential tax benefits, albeit with legal and operational complexities. Divesting properties provides immediate relief but entails relinquishing long-term income streams. Gifting properties may facilitate wealth transfer, yet requires careful navigation of legal and tax implications. Leveraging pension contributions offers tax-efficient strategies for managing portfolios, demanding thorough financial planning. Despite challenges, landlords have avenues to mitigate tax burdens and optimize investments in an evolving regulatory landscape.

In navigating the complexities of Section 24 and high interest rates, buy-to-let landlords must weigh their options carefully. While divesting properties may offer immediate relief, incorporating portfolios, gifting properties, or leveraging pension contributions present alternative strategies to manage tax liabilities. Each approach carries distinct considerations, requiring landlords to assess feasibility and alignment with long-term financial goals. By exploring these avenues, landlords can navigate financial challenges and optimize their property investments amidst evolving regulatory frameworks.


How hard has Section 24 hit the property rental market? 

Despite record-high residential rental rates, landlords face mounting challenges with escalating mortgage interest rates and the impact of Section 24. Introduced in 2015, this tax reform prohibits landlords from deducting mortgage repayments from taxable income, significantly denting profitability. Despite widespread opposition, the government shows no signs of reversing its stance on Section 24. Consequently, many landlords, particularly those in higher tax brackets affected by the legislation, are reevaluating the viability of their rental business amidst enduring financial constraints.


What can I do about Section 24? 


Option 1: Transferring your properties into a limited company 

Setting up a company to manage investment properties, known as incorporation, has gained popularity in recent years, with a surge in property investment firms established across the UK. This trend stems from the advantage that companies can still deduct mortgage interest from rental income, thereby mitigating the impact of Section 24 on taxable profits. By opting for incorporation, landlords seek to navigate the challenging landscape shaped by tax reforms and higher interest rates, aiming to sustain profitability amidst changing regulations and market conditions.

However, incorporation entails various tax considerations beyond mortgage interest deductions. One significant aspect is Capital Gains Tax (CGT), which comes into play when transferring properties into a business. According to HMRC, such transfers are treated as disposals, potentially resulting in substantial CGT liabilities, especially if property values have appreciated significantly since acquisition. Therefore, while incorporation offers benefits in terms of tax relief on mortgage interest, landlords must carefully weigh the implications of CGT and other tax obligations before pursuing this strategy.


Is there any way to reduce CGT? 

Yes, there is a provision called Incorporation Relief that offers some respite, albeit temporary. With this relief, you can defer Capital Gains Tax (CGT) payments, avoiding immediate liabilities. Instead, any gains are transferred into the base cost of company shares upon incorporation.

However, it’s important to note that this deferral is not permanent. When you eventually dispose of these shares, either by gifting or selling them, the CGT becomes due unless you pass away without disposing of them, in which case the CGT liability ceases.


Can you prove you’re a legitimate business?  

Incorporating your property portfolio comes with additional requirements often overlooked. HMRC mandates proving the genuine operational nature of your property business, typically necessitating a minimum commitment of 20 hours weekly for management. For those with just a couple of properties or who enlist management agencies, demonstrating this time commitment can pose challenges.

Moreover, Stamp Duty Land Tax (SDLT) presents a significant consideration. Companies acquiring residential properties for letting purposes face SDLT at residential rates, with an additional 3% surcharge. This charge applies regardless of the consideration provided by the company, based solely on the properties’ market value. However, there’s a possibility to sidestep SDLT if your property business functions as a legitimate commercial partnership before incorporation, involving a spouse, civil partner, or other business associates.


You may need to re-mortgage 

Transferring a mortgaged property might entail challenges, warns Marcia. Incorporating your property portfolio could necessitate remortgaging, potentially at higher interest rates. However, within a limited company, mortgage interest becomes tax-deductible, shielding you from Section 24 implications.

Incorporation isn’t necessarily a simple fix. Seek expert financial guidance before proceeding. This step is crucial, especially if you’ll still rely on rental income post-incorporation.


Option 2: Selling up and moving on

Many landlords are opting to sell their properties amidst rising challenges. Selling is viable for those with a few properties, but it may trigger Capital Gains Tax (CGT) if the properties have appreciated significantly. This decision can be emotionally charged, especially if the properties hold sentimental value or have been in the family for generations. Seek financial advice to assess the long-term implications on your income.


Option 3: Gifting or transferring a property to someone else

Transferring ownership to a spouse or partner can mitigate Section 24 implications, particularly if they fall under a lower tax bracket. However, be mindful of potential Stamp Duty Land Tax implications if the new owner assumes mortgage liability.


Option 4: Making pension contributions

Consider making pension contributions to lower your tax bracket, a lesser-known option. While it can reduce overall tax liability and contribute to your future financial security, rental income may limit the amount you can contribute annually, capped at £3,600 gross. Evaluate whether this approach aligns with your financial goals.

Each landlord faces individual financial situations, blending personal and professional aspects. Consulting a financial adviser is crucial for evaluating the lasting effects of altering your rental property management approach, alongside potential immediate tax advantages. Remember, tax planning is just one component of comprehensive financial management, and seeking expert guidance can instil confidence in both your immediate and future financial prospects.






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