Wednesday 10 July 2019

Does setting up a Limited Company mean a better buy-to-let mortgage?

Author: Cambridge Web Marketing

Buy to let

For landlords with buy-to-let mortgages, the current system of tax relief is being phased out. Starting in April 2017, landlords will find their profits under pressure and their tax liability growing. One solution is to form a limited company, exclusively for gaining relief on a buy-to-let mortgage. How does it work?

The changes in buy-to-let relief

Landlords were warned they face more upheaval again this year, both in terms of rule changes and tax relief. Deposit caps is one idea being considered, according to @thisismoney, along with minimum three-year tenancies and possible rent controls too. The proposed ban on no-fault evictions in England, recently announced by the UK Government, is another example of the changes facing the private rented sector.

Although the majority of private landlords welcome these changes to protect their tenants, the issue concerning diminishing tax relief on buy-to-let mortgages worries many.

Is a buy-to-let limited company the answer?

The latest set of tax reforms relating to rental property and mortgages affects individuals, not companies. Buy-to-let investors will face a gradual reduction in tax relief, starting from April 2017. As your profits fall, your tax bill will rise. By 2020, landlords will have to pay tax on their full rental income without deducting the cost of a buy-to-let mortgage. Instead, you will receive a tax credit equal to 20% of interest costs.

Offered at a set rate rather than according to your income tax band, if you are a higher rate taxpayer, you could end up paying far more tax. If you are a basic rate taxpayer, you may also find that the new way of calculating your earnings could push you into the higher tax threshold, again raising your tax liability.

As these changes affect the individual, creating a limited company may be the answer. With a structured buy-to-let limited company, you won’t face the tax hikes. Legally separate from your own income, tax liabilities will switch from a personal to a corporation tax basis at a flat rate, currently 19%.

Incorporating may not be suitable for everyone, but for many private landlords with buy-to-let mortgages, it could be key in retaining and optimising profit in rental properties.

There are costs involved, which you will need to consider carefully. You’ll also need specialist advice on all aspects of the issue at hand, from your current tax position to setting up the limited company.

Setting up your buy-to-let limited company

If you decide to go ahead with the process of incorporating, you will find that your mortgage options change too. Not all buy-to-let mortgages are available to limited companies, for example. However, with the phased tax relief changes for landlords already underway, many mainstream lenders are making more mortgage products available.

Do nothing, and you may find that the maths behind a buy-to-let mortgage and renting your property no longer make sense. But you need to make the right decision alongside your current financial situation and property portfolio.

And that’s where our specialist mortgage team come in. Contact us today to discuss all your options, including buy-to-let limited companies.

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Written by: Cambridge Web Marketing