Updated: 8th February 2021
The changes facing the tax treatment of buy-to-let landlords are now just around the corner. Announced in 2015 by the then Chancellor, George Osborne, the new rules will see landlords having to pay tax on their entire turnover, rather than just on their profits.
As it currently stands, tax is due on the difference between the rental income you receive and the mortgage interest you pay at your highest rate of income tax. From 6 April however, mortgage interest tax relief will gradually start to be cut back. Between 2017 and 2020, this will be cut to 20pc, meaning tax will be due on the full amount of rental income received, less 20pc tax relief. In effect this means all higher and additional rate taxpayers, who fund their buy-to-let properties with mortgages, will be taxed considerably more.
To combat this, thousands landlords have made the decision to move their buy-to-let properties into a limited company structure in an attempt to lessen the impact of these changes. In fact, in excess of 100,000 properties were bought by landlords within limited companies last year.
Switching to a limited company structure could prove to be a money-saving exercise for many. By running their property portfolio through a limited company, landlords would be subject to different tax rules. They would be exempt from having to pay income tax on their rental income, and instead would be liable for corporation tax. Corporation tax is currently 20pc, but this will drop to 19pc in April 2017 and will fall further to 18pc by 2020. As an added bonus, limited companies can off-set certain costs of running their buy-to-lets as 'allowable expenses' – this includes things such as mortgage payments, wear and tear on the property, and administrative costs such as letting agency fees.
While for some landlords there is considerable appeal in setting up as a limited company, this will not be the best move for all. As a company director there are additional legal responsibilities including submitting your corporation tax return, self-assessment tax return, company accounts and setting up a PAYE salary scheme.
Furthermore the choice of mortgage providers may be reduced once you are a company looking for a loan rather than an individual. With choice of mortgage lenders reduced, the deals open to you may be less competitive in terms of interest rates and set up fees which may eat into any profits you stand to make.
With more landlords than ever before now becoming company directors, what is the advice if it all goes wrong?
If you find yourself in this position then there is obviously a lot for you to think about. You may have particular concerns about the properties you own, and how your current financial struggles may impact on these. You also have the position of your tenants to consider.
Whether your business is suffering due to uncertainty regarding your tax position in light of the new arrangements, struggling to keep up with the mortgage payments on your properties, or being financially impacted due to unpaid rents, or vacant properties, the message is to seek professional advice as soon as possible.
A licensed insolvency practitioner will be able to assess your situation and help you decide on the best course of action going forward. We can provide assistance in all manners of business difficulties, and can help you with all aspects of company rescue and recovery.
We have an extensive network of 101 offices offering confidential director support across the UK.
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