Tax rates and legislation have increasingly been used as a matter of policy in recent years to make ownership of buy-to-let residential properties less attractive to individuals.

The Government introduced changes such as ADS (Additional Dwelling Supplement) and the restriction of mortgage interest relief to discourage the purchase of second homes by property investors and buy-to-let landlords. The rationale behind this was to ease the UK-wide housing shortage and prevent housing prices being driven up by investors with multiple properties and holiday homes.

The most recent change in the current Scottish Budget is to increase the rate of ADS from 3% to 4%. A buy-to-let investor buying a flat for £200,000 will now pay £8,600 more in LBTT (Land & Buildings Transaction Tax) than a first-time buyer.

Together with the restrictions on relief for mortgage interest, and increasing income tax rates in Scotland, both the tax costs of entry to the sector and ongoing tax costs have significantly increased.

Those looking to invest should consider using a limited company structure to lower the ongoing tax cost, given comparatively low corporation tax rates and the availability of full tax relief for interest. However, lenders may seek a higher rate of interest for corporate debt.

Investors with existing portfolios should consider whether moving these to a corporate structure is the right thing to do. Depending on the individual fact pattern, the cost in terms of LBTT, Capital Gains Tax and refinancing may give rise to a favourably short or inimically long payback period compared to any ongoing income tax savings. There may be steps which can be taken to mitigate that cost which our tax specialists would be happy to advise on.

If you want to discuss any of the points raised in this blog please get in touch with me here, or:

Craig Coyle
craig.coyle@campbelldallas.co.uk
0141 886 6644

The information in this blog should not be regarded as financial advice. This is based on our understanding in February 2019. Laws and tax rules may change in the future.