Following then Chancellor George Osborne's announcement during the July 2015 budget that landlords would no longer able to claim tax relief on mortgage interest payments, 40% of landlords said they were considering shifting their properties into limited companies.
To date, it is estimated that only 6% have done so, with the remaining 94% continuing to operate their buy-to-let business as a private individual.
What Changed in 2017?
From April 2017, landlords have received a tax credit for their mortgage interest, but this is being gradually reduced over a four-year period so that by 2020, it will be no more than the basic rate of tax, which is currently 20%.
Furthermore, as landlords are now taxed on their rental income rather than on their profit, many who are lower rate tax payers have been tipped into a higher tax bracket. Even landlords with modest rental incomes faced higher tax bills from the 2017-18 tax year, and will have recently paid a higher amount of tax for the first time in January 2019.
One advantage of placing properties into a limited company is that mortgage interest is still tax deductible and profits can be taken out as dividends, although the tax free dividend allowance has now been reduced to £2,000.
After taking the first £2,000 of dividends, landlords who operate their buy-to-let business through a limited company, or shareholders in the limited company, pay tax at a rate of 7.5%, 32.5% or 38.1%, depending on their income.
A further advantage of incorporating properties is that any dependants, including spouses and children, can be made shareholders of the company and also receive £2,000 of dividends tax free.
Are You Better Off Forming a Limited Company?
While it was rumoured back in 2015 that Osborne would later remove mortgage interest relief for companies that manage properties, this did not occur.
Even if this isn’t the case, the cost of transferring existing rental properties into a limited company could significantly outweigh any tax savings.
Landlords whose properties have risen in value will have to pay capital gains tax of 18% or 28% on the increase when they transfer the properties to a company because that would signal a change in ownership.
The company would effectively be ‘buying’ the properties. This would also trigger a stamp duty liability on any property worth £125,000 or more. Since April 2017, if you transfer more than one property to the company, you will have to pay a 3% surcharge on top of the standard rate of stamp duty for each additional property you incorporate.
Additionally, it might not be possible to transfer your buy-to-let mortgage to the limited company, in which case you’d have the costs of taking out a new company mortgage, probably at a higher interest rate. A number of lenders have introduced limited company mortgages since the Government announced the tax changes but, while the cost of these has come down, they are still more expensive than buy-to-let mortgages.
Even if you've already felt the impact of these changes in your pocket when paying your tax bill earlier this year, you can calculate how your mortgage interest relief - and your tax bill for the coming years - below.
Every landlord has a different set of circumstances and different objectives for their buy-to-let business.
If you're considering moving your properties into a limited company, you can join the Upad Landlord Club to access our tax helpline. Once you have become a Landlord Club member, you can simply call our tax helpline and receive free, independent advice specific to your circumstances to help you plan your buy-to-let activities around the most tax and cost efficient solution for you.