Should you set up a limited company for buy-to-let?

Is a limited company the answer to buy-to-let landlords prayers? With the government announcing legislative changes that will see profits from buy-to-let significantly reduce while the tax rates increase, many landlords are looking to alternative models to keep their enterprise profitable.

Once fully enacted, the changes will see landlords pay tax on the total rental income generated from their properties, and prevent them from deducting the cost of mortgage interest. Instead, buy-to-let landlords will receive a tax credit equal to 20% of the interest cost.

This will increase tax levels for higher and additional-rate payers, and create a system whereby tax can be levied even when no profit has been accrued.

Here’s how the tax changes will affect buy-to-let landlords from April 2017:

• 2017/18: Deduct 75% of finance costs from rental income with a basic rate tax reduction of 25%
• 2018/19: Deduct 50% of finance costs from rental income with a basic rate tax reduction of 50%
• 2019/20: Deduct 25% of finance costs from rental income with a basic rate tax reduction of 75%
• 2020/21: Deduct 0% of finance costs from rental income with a basic rate tax reduction of 100%

Setting up a limited company lets you enjoy fixed rate mortgage repayments

Creating a limited liability company for property purchases and mortgage repayments has proven the most popular method of circumventing these changes. It’s estimated that 75% of buy-to-let property purchases in 2017 will be made through limited companies rather than individual landlords.

Limited companies are exempt from the changes, and will only be required to pay corporation tax on profits. This rate currently sits at 20%, but will fall incrementally to 18% by 2020. Specialist lenders already offer buy-to-let mortgages tailored for companies. Although rates for such mortgages have been relatively high, they have fallen to approximately 0.7% above rates for individual buy-to-let investors over the past year.

These are some of the considerations to bear in mind when deciding whether to set up a company:

• Incorporating is so far only a cost-effective option for higher and additional-rate taxpayers. It is also likely to help basic rate payers with a combined income (from rent and other sources) of £40,000 in future, as the new rules will push these people up to the higher rate of tax.
• When transferring property into a company, it must be sold at market value, which has capital gains tax and potential stamp duty cost implications.
• Landlords may be exempted from capital gains tax if they can prove the property is a ‘business’, rather than an ‘investment’; a classification based on the day-to-day involvement of the landlord with property maintenance and tenant management.
• Setting up as a special purchase vehicle (with the sole purpose of holding properties) can make it easier to obtain a mortgage, and increase the likelihood of a better rate.
• Once incorporated, you will be required to submit complete annual returns and accounts, rather than a self-assessment tax return. A specialist buy-to-let accountant can help ensure prompt, accurate and convenient submission.
• The additional 3% stamp duty now payable on second properties will also apply to limited companies.

Find out how 3 Wise Bears can help your buy-to-let enterprise stay profitable, even in an unfavourable market.