In 2015, then Chancellor George Osborne announced measures that he hoped would ‘level the playing field’ for first-time buyers by reducing the many tax concessions available to buy-to-let landlords, deterring more from entering that market and encouraging some to sell their rental properties.
Landlords accustomed to claiming relief worth 40% or 45% will find their relief restricted to the basic rate of 20% once the changes are fully implemented in 2020. In the 2017-18 tax year, the deduction from property income is being restricted to 75% of finance costs, with the remaining being available as a basic-rate reduction. In addition, the 10% wear-and-tear allowance has been revoked, meaning landlords are only able to deduct costs they have incurred.
Some landlords who foresaw their rental yields falling because of these tax changes chose to set up limited companies and to transfer their rental properties into them.
Limited company drawbacks
The main benefit of holding properties within a limited company is that profits are taxed at 19%. Limited companies aren’t affected by the restrictions that took effect from April, so mortgage interest is fully deductible against tax.
However, recent research suggests that only landlords who own four or more properties stand to gain from a limited company structure. This is in part because limited company mortgage products are only available through a small number of lenders, meaning that the rates charged are often higher than those available to personal borrowers, and more liable to change with market conditions. Plus, many lenders operate under significantly different criteria when lending to limited company borrowers.
Whilst some people have considered buying a property as an individual and then moving it into a limited company, this can have unintended tax consequences. Doing this could give rise to a major capital gains tax liability and create a problem with stamp duty.
As a mortgage is secured against your home or property, it could be repossessed if you do not keep up mortgage repayments.
The information contained within the article is based on our current understanding of taxation and can be subject to change in future. Taxation depends on individual circumstances as well as tax law and HMRC practice which can change.