Tax on Buy-to-Let Income

Is personal ownership or limited company the best?

Article: Phil Weston

With the changes in the tax rules that are due to take full effect in April 2020 more landlords are seeking out the most tax efficient methods of owning property. Purchasing a buy-to-let property through a limited company is now more than twice as popular as buying as an individual according to a recent report.

The buy-to-let market grew rapidly after the financial crisis in 2008 but has recently started to reduce in popularity due to a variety of tax and regulatory changes have hit landlords’ pockets. This is likely to continue for the near future as buy to let investors are targeted by all sides of the political spectrum.

Recent changes in the tax system has increased the burden on the investor in both the purchase of new properties and the ongoing earnings from the investment. Some of the key changes are:

  1. An additional 3 per cent stamp duty surcharge, introduced in April 2016.

  2. The phasing out of mortgage interest tax relief for landlords. The changes to mortgage relief have been phased into the system since April 2017, but by April 2020 landlords will be unable to deduct any of their mortgage expenses from taxable rental income.

  3. Landlords then took a further hit when a shake-up of rules by the Prudential Regulation Authority meant buy-to-let borrowers were now subject to more stringent affordability testing.

  4. Following the changes, landlords who were higher or additional-rate taxpayers would now only get refunds at the 20 per cent rate, rather than top rate of paid tax.

  5. On top of this, landlords could also be forced into a higher tax bracket because they would need to declare the income that was used to pay the mortgage on their tax return.

  6. Due to the tax shake up, limited company status is more attractive to landlords as changes would not affect them and they can offset mortgage interest against profits which are subject to corporation tax instead of income tax rates, which is cheaper.

The increased use of limited company status was further evidence of how the buy-to-let market was changing and demonstrated how brokers and their clients needed “expert specialist support” when buying as a limited company or considering switching. With the changes to tax relief on mortgage interest being felt by many landlords that pay higher rate tax, there’s likely to be more considering the use of a limited company as they seek to grow a portfolio.

  • Being able to set the cost of mortgage interest against income within the limited company will be the main draw and corporation tax is charged at lower rates.

  • If a landlord holds their buy-to-let properties within a company structure they will be taxed on profits in the usual way, and the interest they pay will be treated as a cost.

  • The market has also seen a number of landlords leave the buy-to-let space due to the changes and in May, as research has shown, the number of landlords selling has increased by 25%.

  • The number of new landlords coming to market also took a hit as the number of new purchases fell by over 9%.

Whilst the limited company route is not suitable for everyone it is an additional option that should be looked at. At MWS financial advisers limited we can look at your personal situation and give guidance as the options available to you in the marketplace today.

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