Landlord tax relief changes: Why property owners should consider a limited company

As a landlord, you could see profits for both new and existing buy-to-let investors significantly decline. But if you're a limited company, this may not be the case. Here, Neil Lancaster explains why.

Whether you’re planning a nest egg for the future or an existing landlord with a healthy portfolio, it’s likely you’ll have heard of the most recent changes to residential landlord tax relief. Put simply, the government declared that from April 2017, the level of income tax relief obtainable for landlords had been restricted to the basic rate of tax. Phased over a period of four years, this means that by April 2020, many residential property owners will see their income tax liability on property profits reduced by a basic rate tax deduction; for most, this will be akin to the basic rate value of financial costs. Yet, as a new or current property owner, what does this all mean?

How do these tax relief changes affect me?

Those affected include UK landlords letting residential properties at home or abroad, non-UK landlords letting residential properties in the UK, and those individuals also letting as part of a trust or partnership – all with a total income (including rent, plus employment salary) exceeding £45,000. Up until this announcement, landlords were only taxed on their profits as opposed to their overall turnover, with mortgage interest payments deducted ahead of calculating their tax bill; as a result, many reaped the rewards of substantial savings thanks to the obvious appeal of interest-only mortgages. Yet now, the change could see profits for both new and existing buy-to-let investors significantly decline…but not, necessarily, if you’re a limited company.

Starting a limited company

It may be something you never dreamt of doing, yet despite the somewhat daunting prospect of setting up a limited company, many landlords are successfully taking this leap of faith to safeguard their portfolios against the impending tax change; buy-to-let mortgage applications made via a limited company have significantly increased since the announcement last year. However, as with all new ventures there are of course the positives and negatives to weigh up. Depending on your personal circumstances, making the switch from sole trader to limited company may or may not be the right choice for you. Yet to help you fully understand the potential implications, here are just some of the pros and cons associated with creating your own limited company.

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Pros

Corporation tax – as a limited company, you’ll instead pay corporation tax and no national insurance. By 2020, the main rate of tax will be reduced to 18 per cent (for profits below £30K), while private landlords pay a combined 47 per cent income tax and national insurance.

Borrowing power – when seeking funding from traditional lenders, you will bypass the often-rigorous underwriting criteria of the Prudential Regulation Authority (PRA) as a limited company. This may put you in a stronger position to borrow more in the future.

Dividend Allowance – in April 2016, the dividend tax credit was replaced by a tax-free dividend allowance of £5,000. This means that as a limited company, you could receive an income of the same amount from investment properties alone, with no tax on withdrawals up to £5,000.

Portfolio growth – as limited company owners pay no income tax on existing profits, it’s far quicker to reinvest those funds to grow a buy-to-let portfolio – despite the fact that corporation tax applies to any profits. This is still less than the somewhat higher rate of Income Tax.

Interest payments – when it comes to mortgage interest payments, landlords acting under a limited company can declare this as part of the company’s expenses, and thus avoid the taxes affecting sole traders.

Cons

Choice of lenders – as a limited company, you’ll find you have less choice when searching for the right mortgage. For those that do lend to a limited company, the product range will be much smaller, with higher interest rates and fees compared to private buy-to-let mortgages.

Capital gains tax – limited companies do not have access to a capital gains tax allowance as individual landlords do. When selling a property, sole traders are eligible for a £11,700 capital gains tax allowance (2018/19).

Transferral of properties – when making the transition from an individual to a limited company, landlords are liable to pay the additional cost of both capital gains tax and stamp duty land tax on existing investment properties.

Mortgage fees – if converting from private investor to limited company ownership, landlords may be stung by further fees before they even start such as early repayment charges on an existing mortgage, remortgage fees and any associated legal costs.

Running costs – building your limited company, from initial set-up to long-term maintenance, is a time-consuming responsibility that doesn’t come cheap. Additional costs including company and corporation tax calculations for HMRC, annual audits and legal fees all come with a hidden price tag.

By considering just some of the many pros and cons associated with starting a limited company, evolving your portfolio in this way could put you and your investment in good stead for the future. With expert advice readily available and tax changes swiftly in motion, a landlord’s options are most definitely wide open.

Neil Lancaster is a partner at Adams Moore Accountants

Related Topics

Property
Tax relief