Buy-to-let properties are back in fashion…
This is because rental yield is becoming higher due to the increased rental demand. Moreover, mortgages are now available in abundance.
However, like any other business, buy-to-let properties do come with their risks. One of the best ways to avoid this risk is to choose the correct business structure for your buy-to-let property.
There are several options available to a buy-to-let landlord that can be availed, and each has its own pitfalls.
Most of the BTL landlords either own the property personally or follow and investment company structure.
Tax Relief on Mortgage Interest
In the past, owning a buy-to-let personally used to be the most profitable option. However, this has changed since the announcement of new tax rules for buy-to-let properties.
Back in the day’s landlord could offset mortgage interest payments against rental income.
However, in 2015, the government decided to phase it out.
Consequently, in the tax year 2017-2018 the claimable tax relief reduced to 75%. In the tax year 2019-20, it has dropped a further 50% to 25%, and it is suspected that it will drop to an absolute zero in the forthcoming year.
Moreover, the government has taken other steps to replace this with a 20% tax credit which is a further burden on the BTL landlord.
To ease up the burdens of the new rules being implemented by the government, many BTL landlords are now considering setting up a limited company structure for their BTL business.
This gives them the advantage of being subject to corporation tax rates of 19% instead of the higher individual tax rates.
For instance, if your property is making £10,000 profit per annum, then an additional rate taxpayer will be paying income tax equal to £4,500.
However, if the same person puts the property in a company’s business structure, he would be levied to pay only £2,000 in corporation tax per annum.
This will save up £2,500, which makes up 55% of £4,500. As a result, the saved money can be used for further investments.
With these changes being implemented by the government, it has become very important for BTL landlords to choose the correct business structure and try to make sense of the tax situation either on their own or through professional help. It is a good time to consider every available option.
Advantages of Having a Company Structure
There are several advantages of having a company structure for a BTL business.
Apart from the abrupt tax changes implemented for an individual owning a property, having a company business structure enables you to bring in a family member. You can provide them with an income or effectively plan an inheritance tax liability system.
Some of the advantages of the company structure include:
- The company gives you the ability to use multiple personal allowances and basic rate bands to minimize the tax as much as possible.
- Your personal expenditures can be made in a tax-efficient way. For instance, you can fund the tuition fee for the school or college of your children or grandchildren using the dividends from a shareholding.
- Your family members can actively take part in managing and running the business through the company.
- Passing down the control of the company to children is an easy and gradual process.
- Gifts of shares to the landlord family member can reduce the taxable estate for inheritance tax. This is because genuine gifts to family members are exempt transfers. However, this only works in the case that you survive the gifts for over seven years.
There are cases where the family investment company structures become complicated.
In such situations, more attention is required towards the company in order to register any changes in ownership.
In Case of a New Business
If you are just joining the BTL business world, then you can go for the company structure from the outset.
The advantage of this is that your personal liability will be transferred and the overall risk to the company will be transferred as a separate legal entity.
Moreover, you can avoid a second stamp duty charge and conveyancing fees in the coming years.
This is if you transfer personal owned property into the company structured property.
Incorporating an Existing Business
If you are already in BTL business and are considering shifting to a company business structure from a personally owned BTL business structure, then the initial costs of doing so are high.
You would have to pay a second stamp duty charge as well as potential CGT charges. However, a company is absolutely based on a tax-efficient structure to retain most of the rental income.
So, in the long run, you will easily cover all of these additional high costs of changing the business structure.
