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Apr 16

Is it time to incorporate your buy to let?

Buy-to-let landlords have had a rough ride from the chancellor in recent times.

Over the past 12 months, George Osborne has taken away valuable reliefs such as the ‘wear and tear’ allowance, added extra stamp duty charges for landlords and is scaling back mortgage interest relief from April 2017.

Many landlords are considering selling up, while others are weighing up whether it is worth managing their portfolio through a company.

At the end of last year, a report, Buy to Let Britain, by building society Kent Reliance, found mortgage applications through limited companies had trebled in September 2015 compared to the year before.

This was in the aftermath of announcements that mortgage interest relief for individuals would be reduced to a maximum of 20 per cent from April 2020. Companies can still get the full relief.

But that doesn’t necessarily mean running a buy to let through a company is right for everyone.

Running a buy to let as an individual

If you run your buy to let outside a company structure, you will have to pay income tax on any rent you receive.

Your income would form part of your annual self-assessment and would be added to other personal money you receive, such as salary or dividends.
The amount paid is determined by their income tax band.

A basic-rate taxpayer would pay 20 per cent, while a higher-rate taxpayer pays 40 per cent and tax is 45 per cent for additional-rate taxpayers. Currently landlords are able to claim relief for interest on buy to let mortgage payments at their own tax rate.

So a landlord receiving £1,000 a month in rent with an interest-only mortgage payment of £600 only pays income tax on the remaining £400. For a 40 per cent taxpayer this would mean a £160 tax bill, leaving them £240 profit.

But rules being introduced from next April 2017 will see the tax relief reduced up to 2020, when it will be set at a maximum of 20 per cent.

At that point, the same landlord would face a £280 tax bill, halving their profit to £120 a month.

Individuals can reduce their tax bill by claiming for items such as mortgage arrangement costs and lettings fees. They used to be able to claim up to 10 per cent for ‘wear and tear’, but now they can only claim for the actual costs of replacing items.

Running your buy to let as a company

The scaling back of mortgage interest relief has led many landlords to incorporate, as companies can still claim for it.

A company would pay corporation tax on any profits. This is currently set at 20 per cent, but is being reduced to 17 per cent by 2020, less than what an individual would need to pay.

While individuals can take all the income for themselves, subject to tax, it is slightly trickier to take money out of a company.

The funds don’t technically belong to you, as they form part of the business.

You will need to take money out in the form of a dividend. Since the beginning of this tax year, the tax on dividends has changed.

You can now take £5,000 tax-free, but after that there is a 7.5 per cent charge for basic-rate taxpayers, 32.5 per cent for those on the higher rate and 38.1 per cent for the additional-rate band.

Businesses also have several responsibilities that individuals don’t need to worry about, such as completing annual returns and accounts.

Even if all this doesn’t seem too scary, remember it could still be costly to move an existing buy to let into a company. It would be like disposing of an asset, making a gain and then making a new purchase, so there would be capital gains tax and stamp duty to pay.

This is where an accountant could be handy. They can help manage the books and weigh up the costs of incorporating against any benefits you would gain from paying the lower corporation tax and keeping the mortgage interest relief.

About the author

Chris Conway Photograph  Chris Conway is the Managing Director at Accounts and Legal, who specialise in providing accounting services, taxation and business advice to individuals and small businesses owners. Founded only three years ago, its philosophy has been to deliver an accounting service which offers more than just statutory compliance, by helping interpret technical accounting and taxation topics in a way that is digestible and useful.

View more posts by Chris Conway

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