Following then Chancellor George Osborne's announcement in the July 2015 budget relating to the reduction of mortgage tax relief for private landlords, there was been a lot of talk within the media about whether or not it is wise for buy-to-let landlords to incorporate their property businesses into limited companies.
Much of this debate has been fuelled by the aforementioned changes to the buy-to-let tax rules, which have reduced yields for many private landlords by introducing new legislation concerning mortgage interest tax relief, which affects individuals.
How Did the Landscape Change for Private Landlords?
Prior to April 2017, landlords were able to deduct mortgage interest and other allowable costs from their rental income, when calculating the tax that they owed to HMRC.
Consequently, the final income declared to HMRC would be much lower, meaning tax bills were in turn smaller, helping to make buy-to-let a profitable venture for many landlords and potentially helping keep them within a lower income tax band.
However, the rules around mortgage interest tax relief changed and from April 6th, 2017, the amount of interest declarable against income, began to reduce.
- In April 2017, this reduced by 25%, meaning that landlords could only claim 75% of their interest and other allowed costs against their rental income.
- In April 2018, this fell to 50% and in April 2019 this will reduce further to 25%.
- By April 2020, landlords will have to declare all rent as income and pay the income tax on their declared total. They will be entitled to claim back a 20% tax credit.
As a result, the amount of taxable income from property is greater (by virtue of a reduced amount of tax-deductible interest), potentially pushing some landlords into a higher tax band, which in turn would also result in larger tax bills, and indeed has done so for some.
Back in March 2017, This Is Money estimated that as many as 440,000 landlords who were basic rate taxpayers could end up in a higher rate tax band as a result of the rule changes.
You can find out how Section 24 will affect your taxes with Upad's free calculator.
How Does Tax Differ for Limited Companies?
Many lenders require the limited company to be an SPV (Special Purpose Vehicle), dedicated solely to property investment).
- Limited companies pay corporation tax at a current rate of 19% on profits. A corporate structure offers a greater opportunity for tax-deductible expenses, which could mean a lower tax bill than if you manage your property or portfolio as a private individual.
- Landlords investing in property via a limited company will still be able to receive an income through a dividend, which is taxable after the first £2,000, which is the tax free allowance, but may be more tax efficient than tax on profits in the hands of an individual property investor.
This corporate structure alternative has given plenty of landlords food for thought, but it is far from straight forward, with other financial implications that need consideration for anyone looking to switch into a limited company.
Limited Companies and Buy to Let
Points to consider:
- There are currently fewer limited company buy-to-let products than those for individual landlords, although many lenders do now offer these.
- Mortgage rates, and therefore monthly repayments, are typically higher.
- Tax might be less than for individuals, but total annual mortgage repayments may outweigh the tax saving.
- Transferring property into a limited company could attract a capital gains tax liability.
- Transferring a property into a limited company will incur costs such as stamp duty cost, lender and legal fees and valuation costs.
- Greater administrative burden for operating a limited company.
In cases where a property lies empty and is owned by a company, depending on the value of the property, there may be a liability for Annual Tax on Enveloped Dwellings (ATED). The threshold for ATED has fallen over the past few years and at present, companies owning UK residential property worth in excess of £500,000 may be liable for ATED or may at least have to file a return to HMRC, subject to criteria.
The 2017 Autumn Budget put a greater onus on capital gains tax too, with the Chancellor, Philip Hammond, announcing measures to freeze the indexation allowance that companies were previously able to apply and deduct when calculating a gain from the disposal of an asset such as property.
The above issues underline the complexities involved in transferring property from an individual to a limited company.
All cases will depend upon the personal circumstances of the individual and in order to determine whether a landlord would be better off owning rental property in a limited company requires technical expertise; therefore it is essential to seek professional tax advice to establish the best course of action.
Landlords can access independent tax advice by joining the Upad Landlord Club below.