Landlords: Limited Company or Sole Trader structure?
Building your business around owning and renting property can help build immediate cash flow as well as long-term a view to retirement. These are the benefits of being a landlord but you should also consider your tax position as a landlord, as the tax rules around buy-to-let properties are changing.
Landlords, your tax position is changing, read on to find out more.
Perhaps the most obvious benefit of being a landlord is the potential for property appreciation. Ideally, you should plan on keeping your rental property for at least seven to ten years to benefit fully from return on investment on any property you own.
Due to the current political and economic climate in the UK and the slowdown of the global economy more generally, commercial property interest is on the up versus residential property investments. Whatever property type you consider, don’t discount the power of property appreciation for long-term investment.
However, you should also be aware of the tax rules changes around mortgage interest relief which has already begun and is being phased out currently and will change to tax credits by April 2020.
Read on to learn how this could affect you as a private landlord.
Mortgage interest relief changing to tax credits
Before April 2017, borrowing money through a buy-to-let mortgage was a major tax advantage with mortgage interest payments given tax relief, known as 'mortgage tax relief'. Unfortunately, mortgage tax relief is being phased out currently and by April 2020, it will be replaced by much less valuable tax credits.
Tax credits amount to 20% of your mortgage interest payments receiving tax relief. Compare this to 40% for higher rate tax payers under the old rules - so a considerable reduction in tax savings.The new tax-credit system is being phased in from now, which means for the current tax year 2019-20 you can deduct one quarter of your rental income while three quarters of your mortgage interest payments will receive the 20% tax credit.
By April 2021, all mortgage interest will only receive the tax credit. Compare this to the 2017-18 tax year where you could claim 75% of your mortgage interest tax relief.
So in practice, this could mean that as previously you received rent on your property that covered your mortgage payments and little extra cost to you as a landlord to maintain the upkeep of the mortgage, there will be a significant increase in your tax bill from April 2021.
Furthermore, if you're a higher or additional-rate taxpayer, you won't get all the tax back on your mortgage repayments as the credit only refunds tax at the basic 20% rate, rather than the top rate of tax paid.
Another side effect of the change in tax law could be that you are forced into a higher tax bracket because you’ll need to declare the income that was used to pay the mortgage on your tax return. S
o your total income could be pushed into the higher rate tax band (£50,000 in 2019-20 in England and £43,431 in Scotland) or additional-rate (£150,000) tax brackets, depending on your income from other sources, such as your salary or pension.
Private landlord versus limited company business
This change in tax relief only affects private landlords, in other words people who own their properties as individuals (or couples), rather than through a limited company.
So in theory, by setting up a business that owns the rental properties, landlords will be able to continue to declare rental income after deducting the mortgage interest payments. However, this does not necessarily mean you will be better off, in fact there is a chance that you could also be worse off.
One of the reasons for this is that mortgage rates for businesses are more expensive than for private landlords, which could cost more than you’d save in the tax relief your limited company is eligible for.
More crucially, under a limited company structure you will need to pay an extra round of stamp duty when you transfer ownership of the property to the limited company. Your tax administration compliance reporting under a limited company structure will also be more burdensome and complex. You will be subject to corporation taxes as well as potentially income tax if you pay yourself a salary.
Although you will likely pay a lower rate of income tax in this case, we strongly suggest you speak to an accounting and tax specialist, like Mirandus Accountants, to help you understand how to position yourself tax efficiently.
