Recent tax changes have seen more and more landlords setting themselves up as a limited company. But is this the right approach for you?

In the past, landlords were only taxed on their profits as opposed to their turnover, with mortgage interest payments deducted ahead of calculating the tax bill. This saw landlords claiming tax relief on their mortgage interest repayments at their prevailing tax rate – 20% for basic-rate taxpayers, 40% for higher-rate taxpayers and 45% for additional-rate taxpayers.

The major change was made by the Government to residential landlord tax relief from April 2017, which saw the level of income tax relief obtainable for landlords restricted to the basic rate of tax. The change was phased in over four years, meaning that the tax relief will reach its lowest level by April 2020.

This means landlords will only be able to claim tax relief for mortgage interest at the basic rate of 20%, potentially increasing tax liabilities for higher- and additional-rate taxpayers by thousands of pounds.

The changes affect UK landlords letting residential properties (both at home or abroad), non-UK landlords letting residential properties in the UK and anyone letting as part of a trust or partnership. Total income (including rent, plus employment salary) needs to exceed £45,000 — the higher tax band.

Meanwhile, corporation tax rates have been falling, from 19% to 17% by April 2020. This is why many landlords have been rushing to turn their letting business to a limited company structure. In fact, one buy-to-let lender reported that in the first three quarters of 2017, seven in 10 buy-to-let mortgage applications were made via limited companies.

Making the change from a sole trader to a limited company is a big step, so first you need to assess if this suits your personal circumstances. Here are the main benefits:

The Benefits of a Limited Company
Corporation tax: being a limited company means you’ll pay corporation tax, not income tax or national insurance. By 2020, the main rate will be reduced to 18% (for profits below £30K), while private landlords pay a combined 47% income tax and national insurance.

Borrowing: as a limited company you will you will avoid the laborious underwriting rules which could allow you to borrow more money in the future.

Dividend Allowance: you can receive a tax-free dividend allowance of £5,000.

Portfolio: with no income tax on existing profits, limited companies can invest those funds to buy more properties. Although you pay corporation tax, this is much less than higher rate income tax.

Interest payments: landlords acting as a limited company can declare interest as a company expense, avoiding the taxes which affect sole traders.

Inheritance: buying property as a limited company can avoid a large portion of inheritance tax. This is important for landlords who plan to pass on their portfolio to family members.

The Negatives of a Limited Company
Mortgages: you could find that there are fewer mortgages available, with higher interest rates and fees compared to private buy-to-let mortgages. When changing from an individual to limited company, you could incur fees such as early repayment charges on an existing mortgage, remortgage fees and legal costs.

Capital gains tax: limited companies do not get capital gains tax allowance, while individual landlords are eligible for an allowance of £11,700 (2018/19) when they sell a property.

Transferring properties: when switching from an individual to a limited company, landlords are liable to pay the extra cost of capital gains tax and stamp duty on existing investment properties.

Running costs: having a limited company means there are more calculations and more legal and accountancy fees.

Higher rents: some tenants have seen rents rise as landlords seek to portray themselves as a professional company rather than a private individual landlord. Landlords may also wish to recoup the higher fees for limited companies.

In conclusion, starting a limited company provides a solid foundation for your property portfolio and protects your investment. Just be aware that it is not right for everyone, so you will need expert advice to decide the best route for you. As always, seek professional advice from your accountant or a property tax specialist.

If you have any questions regarding the new legislation, please contact Knight Property Management for a free, no obligation chat. Call us today on 01992 308181.