When it comes to owning a buy-to-let property, there are two ways to invest – in your personal name or via a limited company.
A recent study has revealed that landlords are increasingly investing in buy-to-let properties through limited companies, with 44% of completed buy-to-let mortgages now being through limited companies, that’s an increase of 42% from the previous quarter.
In addition to this, the number of buy-to-let lenders offering loans to limited companies has also increased, rising by 47% over the past 12 months.
This significant increase is in response to changes in buy-to-let tax regulations.
Prior to April 2017, landlords who also owned homes in their name could deduct their mortgage interest from their rental income before paying income tax. This meant that the income landlords had to declare to HMRC was much lower than their rental income, keeping their costs down and keeping many landlords within a lower income tax bracket.
However, this is gradually changing with the amount that can be written off dropping by 25% each year. By 2020, all rental income will be eligible for income tax, with tax relief being gradually reduced until only basic rate relief (20%) is available.
This doesn’t apply, however, if the buy-to-let property in question is owned through a limited company, as the property is then viewed as a business and all expenses can be written off.
Rather than paying income tax as an individual, limited companies pay corporation tax at 19%. The government announced a further reduction to the Corporation Tax main rate (for all profits except ring fence profits) for the year starting 1 April 2020, setting the rate at 18%.
When bought through a limited company, a landlord can still take an income from their rental property, in the form of dividends. They will only pay tax on the amount of dividends they take, theoretically cutting their tax bills significantly.
Of course, there can also be a number of potential downsides to investing in property via your limited company and it’s important that you are aware of them, as well as the potential benefits.
For example, mortgage costs can often be higher on limited company buy-to-let mortgages and the costs involved in holding buy-to-let properties are different depending on whether it’s done through an individual or a limited company.
Investing through a limited company structure incurs two major tax bills – capital gains tax and stamp duty, which can negate any benefits from tax relief, particularly for landlords with just a small number of properties.
All of these factors must be weighed up in order to determine which will leave the owner better off.
If you’re a contractor, business owner or independent professional and you’re considering buying a property through your business or looking to get a Buy to Let property, get in touch.