LEGAL
Tax changes - will you be affected?
Rose Jinks (pictured), on behalf of specialist Landlord Insurance provider Just Landlords, explains the tax changes that will affect many buy-to-let landlords this month as of 6 April.
THE TAX CHANGE In the 2015 Summer Budget, then Chancellor George Osborne announced that the amount of finance costs that individual landlords can deduct from their turnover before declaring taxable income will be cut. The reduction to the basic rate of Income Tax will be
phased in gradually (by 25% per year) from this month onwards. The restriction will be fully implemented from 6 April 2020.
WHO WILL BE AFFECTED? While the change is only supposed to affect higher rate taxpayers, many landlords – estimated to be around 22% – will be forced into the higher rate tax bracket as a result, and will therefore be subject to the reduction. At present, all landlords can deduct a number of
finance costs, including mortgage interest, as a business expense. But, when the change is fully implemented, individual landlords will no longer be able to deduct finance costs from their turnover before declaring their taxable income. The change means that landlords will be taxed on turnover rather than profit, as they will be unable to deduct finance costs from their rental income when calculating a profit on which to pay tax. As many basic rate taxpayers will be forced into the higher bracket, a significant number of landlords will find themselves making a loss on investments when the change is fully implemented.
WHO WON’T BE AFFECTED? Those that are least likely to be hit are extremely wealthy landlords without mortgages, although the change will not affect landlords operating through limited companies. As a result, many investors are looking into swapping
their buy-to-let businesses over to this structure. Although this may prove a successful option for some, anyone considering this must be aware that limited company buy-to-let mortgages carry higher interest rates. Just Landlords suggests landlords only opt for this
structure if they are on the higher tax rate – anyone earning over £43,000 per year, or £45,000 when the change comes into force – and have mortgage loan-to- value (LTV) ratios above 50%. Those on the borderline of the threshold must be careful, as they may be pushed into the higher bracket this month.
SEEK ADVICE Unless you are completely sure the change will have no impact on your finances – for example, you have no buy-to-let mortgages – it is important to seek finance and tax advice on how you personally will be affected by the change. Only then can you make an informed decision on
whether to change to a limited company structure, continue operating as you are, or leave the buy-to-let sector altogether. While the tax change may prove challenging for
many landlords, it is important to understand there are ways to work around the difficulties.
‘When the change is fully implemented, individual landlords will no longer be able to deduct finance costs from their turnover before declaring their taxable income’
Now directors could PAYE the penalty
Leading firm of chartered accountants, Newby Castleman, has warned company directors that they may be held personally liable for unpaid PAYE tax and National Insurance contributions, following a landmark legal ruling. A tax tribunal in a recent case
found that two company directors were liable for PAYE on their salaries after their business became insolvent. PAYE regulations state that responsibility for any unpaid sums can be transferred from the employer to the director if the director knowingly fails to deduct the PAYE and pay the tax due on a salary.
48 business network April 2017 A company director, drawing
down a salary while knowing of severe cash flow problems, would be hard pressed to argue that they were not aware that the tax might not ultimately be paid – and HMRC has now begun to exploit this situation to recover unpaid tax. In a recent case, directors were
found to have ‘wilfully procured the company to pay their remuneration without deduction of tax’ and were personally ordered to pay £108,000. John Griffin, Partner at Newby
Castleman, said: “HMRC is now using existing legislation in new ways. They are seeking to make an
may not have sufficient funds to pay the tax due. “Directors need to take advice
from a professional insolvency practitioner as soon as they become aware that their business is at risk, and not wait until administration is almost upon them. “Even if the directors feel their
John Griffin
example of directors of insolvent companies who have taken a net salary, knowing that the business
business is likely to come through the other side of financial difficulty, a qualified insolvency practitioner can ensure that adequate contingency plans are in place to fulfil financial commitments. This case illustrates the dangers of leaving such matters too late.”
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