Buy-To-Let Company accountants guide

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Originally Posted On: Buy-To-Let Company accountants guide – GM Professional Accountants

HMRC have imposed restrictions on income tax relief on finance costs for buy-to-let properties. You may wonder: Is it now more beneficial to buy personally or via a limited company in the wake of these restrictions?

With effect from 6 Apr 2017 for 2020-21 taxation year, you cannot claim a deduction for finance costs from your income from a property while calculating your taxable profits if you own a buy-to-let property in your name. You will only get a tax reduction at a base rate towards finance costs from your total income tax liability.

It has now become a game-changer regulation for landlords. They introduced the new regime phasing in over four years:

Tax Year Finance cost deduction from property income  Basic rate reduction from IT liability

2017-18                75%                                            25%

2018-19                50%                                            50%

2019-20               25%                                            75%

2020-21                0%                                            100%

Therefore, owing to the above changes, it has recently become beneficial to buy a buy-to-let property through an SPV limited company instead of buying as an individual.

Recent research reports suggest that corporate landlords now own about 20% of rental properties. It has become more popular in the capital region. Company landlords now own more than 25% of rental homes in London.

Buy-to-let landlords can now buy the property through an SPV limited company where the shareholder and company directors become the investors.

This route brings instant benefits to landlords. At present limited companies can offset entire mortgage interest expenses against rental income profits. They pay corporate tax only on the balance profits. The corporation tax rate is presently 19%.

If you own an existing portfolio of properties, it is now possible to transfer the ownership of your portfolio to an SPV limited company.

You will have to consider any such transfer of property at the market price. It implies that you may incur additional costs towards stamp duty, capital gains tax, legal charges, and mortgage/valuation fee.

It is essential to note that maintaining a limited company involves a few costs, including its running expenses and fees towards legal obligations like filing of statutory accounts periodically. But at the same time, you stand to gain in terms of some tax-deductible expenses: mortgage broker fees, accountancy fees, and lender arrangement fees.

The next question is how to draw funds from your company. You can withdraw money by way of dividends and salaries.

A business can pay a dividend from profits left after the corporation tax payment. However, the respective recipient shareholder needs to bear a further dividend tax on receipts above a 2,000 tax-free allowance limit for 2019-20. Remember that the limited company has already paid the tax on profits. Besides, the total annual shareholder income will determine the applicable dividend tax rate.

Furthermore, if the landlord does not require income to meet current personal expenditure, the limited company can reinvest retained funds to own other properties whenever any opportunity arises.

You require careful planning to reap the benefits of this regulation. In the short-term, the cost of transferring a buy-to-let property to a limited company may outweigh the expected benefits. The mortgage interest restriction took four years to reduce to base rate tax relief. Hence, landlords had ample time for planning. If you plan to keep the property for the long-term, it may be more beneficial to buy new buy-to-let properties for tax purposes directly in a company’s name.

If you require rental income for your regular living expenses, you will have to find ways to extract revenue from the company. However, this may partly or wholly nullify tax benefits you made by taking buy-to-let property in the company’s name in the first place.

You also have to consider that the company will pay corporation tax on the gains out of selling a property, whereas as an individual, you get annual capital gains tax free allowance limit of £12300 for 2019-2020.