JL: We spoke to Alex Bari, Tax Partner at Barnes Roffe LLP for to find out his top tips for mortgage brokers. Alex, when is the main time brokers should recommend specialist property tax advice to their buy-to-let clients?
AB: The main tax consideration that brokers currently face is whether their buy-to-let clients should incorporate their investment and how they should do it.
Incorporation can be the most tax efficient way for an investor to hold their investment, but it is worth noting that it is not always the most appropriate approach. If, for example, an individual plans to always take the maximum income from the company, it could be the case that the professional fees incurred could exceed any tax benefit. Whereas, for an investor who continually re-invests income into the company and takes a long-term view, the benefits of incorporation can be more pronounced.
Generally, you will want to convey your properties into the Company on incorporation, however, this is not always necessary. If you do choose to go down this route it will require the properties to be re-mortgaged.
JL: What are the basic mechanics and tax considerations of a buy-to-let investment that is held in a company structure?
AB: When a property is held within a company, corporation tax is due on any profit from rental income, or disposal of assets. Corporation tax is currently 19% and will reduce to 17% in April 2020.
Investors can choose to then take an income from the property by standard methods such as salary, dividends or interest, but should be mindful of their own tax position. It is also, on occasion, possible to create a Director’s loan account on incorporation, which will allow you to take money out of the company without incurring any further tax. Subject to the above, the most tax efficient way to take income out of a company would be to retain all profits within the company, and then liquidate the company when they require the money in the future, as this will be taxed at just 20%.
These are general guides, but it is worth noting that tax planning, like mortgage advice, should always be tailored to the individual as there are numerous considerations that could influence the best approach. As a broker, you should really be looking to establish a relationship with a specialist property tax adviser to whom your clients can speak to about their circumstances. It’s important that it should be a property tax specialist. There is a lot of detailed legislation to consider that a normal accountant may not be able to deal with and we have even encountered clients who have received questionable advice from a barrister. So, it’s important that your clients choose their partner correctly as getting it wrong can be incredibly expensive.
JL: And do you have any tips on how to find a good property tax specialist?
AB: When it comes to finding the right firm, work on recommendations and meet the accountants to get an understanding of their specialist capabilities. There is no qualification for property tax specifically, but you should look for someone who has specialist tax qualifications. This isn’t a guarantee in itself that they are the right choice, but it can provide some comfort.
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