"Calculating the best outcome for any buy-to-let client can get very technical! Which is why mortgage brokers cannot give advice in this area and must refer clients to a qualified tax adviser."
A second wave is anticipated over the next few years as the impact of rising interest rates hits landlords’ profits, prompting more of them to restructure the way they own their properties for maximum tax efficiency.
Placing buy-to-let property in a limited company wrapper can have many advantages. Landlords can still offset 100% of their interest payments against their tax bill – a relief no longer available on personal buy-to-lets. Rental income is taxed at the corporation tax rate of 19%, rather than a landlord’s personal tax rate, making incorporation particularly attractive to higher and top rate taxpayers. And limited company buy-to-lets are also more flexible in many ways, allowing owners to access the equity in their properties via director’s loans, for example.
But they can come at a cost – and it is the job of a tax adviser to calculate whether that cost is worth paying for your clients, as every individual’s circumstances are different. As a broker you need to be aware of the basic rules so you can inform your client, but never advise.
When a landlord transfers a property into a limited company the process is called ‘incorporation’ and is regarded as a financial transaction – the company effectively buys the property from the individual. As a result, the owner has to pay stamp duty as they would with any purchase, but usually charged at the higher rate (+3%) for second homes. If the property has risen in value, they must also pay Capital Gains Tax on the amount of the increase. A basic rate taxpayer with income of £50,000 or less will pay 18%, a higher rate taxpayer earning more than £50,000 pays 28%.
Everyone has an annual Capital Gains Tax allowance which is tax-exempt – at present this stands at £12,300, so the tax is only payable on any gain greater than this amount, and costs such as the original stamp duty paid, solicitor’s and estate agent’s fees, valuations and survey charges and costs linked to improvements can be deducted from the gain to reduce the tax burden.
Another helpful concession is incorporation relief, which defers any taxable gain until the shares in the company are sold. Not all landlords can benefit from this relief, however, as it is only offered on businesses, and passively letting a property to a tenant is not considered a business by HMRC. In order to qualify for incorporation relief, a landlord must be able to prove that they spend at least 20 hours a week actively running their portfolio and providing services to their tenants, so no letting agent can be involved. They must also be in a partnership, which their accountant can set up with HMRC (variations are permitted for single landlords).
As you can see, calculating the best outcome for any buy-to-let client can get very technical! Which is why mortgage brokers cannot give advice in this area and must refer clients to a qualified tax adviser. But what brokers can do is generate two European Standardised Information Sheets at the start of the buy-to-let mortgage process, one personal, one limited company. It is important at this stage to impress on your client that they should not be swayed by the headline interest rate. Limited company buy-to-let borrowing rates tend to be higher than personal, but once the tax reliefs and allowances are taken into account, the numbers can tell a very different story.
