The tax implications of buy-to-lets: is it worth setting up a limited company?

 

It’s important to look at the tax implications of buying a property both as an individual and through a limited company to see what the best structure is for you, especially with new tax regulation being rolled out.

With the self-assessment tax deadline fast approaching on 31 January, which is applicable for investors and landlords who own property as an individual, we look into the tax implications for profits, mortgage interest relief and capital gains made on the sale of a buy-to-let property. And depending on whether you bought the property through a limited company or as an individual will have different implications.

Profits

When purchasing a property through a company, the profits are subject to corporation tax, which is currently 19%. If you draw any funds from the company as dividends, you’ll then be taxed personally at special dividend rates. These range from 7.5% for basic rate taxpayers up to 38.1% for additional rate taxpayers.

When buying a property as an individual, the profits you make are taxed based on the income tax band you fall into after adding up all of the income you have earned, even from other employment. For the 2019/20 tax year, if you earn between £12,501 and £50,000, you’ll be taxed the basic rate of 20% on income over £12,500. If you make £50,001 to £150,000 you’ll be taxed the higher rate of 40% on the income in that bracket. And for anything over £150,000, you’ll pay the additional rate of 45%.

One of the key factors in determining whether it’s better to purchase buy-to-let property as an individual or through a company depends on how much you earn from all of your sources of income. If you’ve already bought a property as an individual, it’s costly to transfer it to a limited company. However, it can be helpful to figure out what strategy is best for you moving forward to help you make decisions when purchasing buy-to-lets in the future. We can put you in touch with an independent tax expert for further information.

Mortgage interest relief

After buying a property through a company, the mortgage interest receives 100% relief against the property income. If you buy the property as an individual, only 25% of the mortgage interest will be offset against your income for the 2019/20 tax year. Next year, there won’t be any mortgage interest relief for individuals, although you will be able to claim a 20% tax credit based on your mortgage interest payments.

It’s important to keep in mind that mortgage interest rates for companies are typically higher than mortgages for individuals. However, there are typically higher tax relief options for those who buy through a company.

Property sale

When selling the property through a company, any capital gains made on the sale are liable for the 19% corporation tax. On the other hand, when selling the property as an individual, you receive an annual exempt amount of £12,000. Then, if there’s any remaining profit, you’ll owe 18% if you’re a basic rate taxpayer and 28% for higher and additional rate taxpayers.

Setting up a limited company

There are pros and cons to running your buy-to-let property portfolio through a limited company. One of the main benefits is that you might be able to take advantage of more favourable tax rates. This is like to be especially important as the Section 24 changes continue to be rolled out, which has resulted in many landlords and investors losing tax relief they once were able to claim.

One of the main disadvantages is buy-to-let mortgage rates for limited companies are often higher, so it’s important to weigh this up against the potential tax savings. Seek professional financial advice to help you determine if setting up a limited company to operate your buy-to-let properties through is right for you.

If you’re interested in learning more about setting up a limited company, find out more in this guide.

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The tax implications of buy-to-lets: is it worth setting up a limited company?

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