You have probably already heard that the government is introducing many changes which make owning Buy to Let properties in your own name less and less profitable.

Maybe you have heard of some people running their single or multiple properties through a limited company and wonder whether that is only for the select few or something you too should consider.

Below I will attempt to outline the key changes, facts and considerations so that you can make an informed decision on this matter.

Historically, most landlords bought rental properties in their personal name much like their main dwelling and on their annual tax return stated the total income derived from rent and then deducted all linked costs associated with the running of that investment property.  This included the deduction of:

1. Mortgage Interest

2. Broker fees, (some brokers whilst getting a paid a basic procurement fee from the lender also charge an additional fee to the landlord for their service).
3. Lender arrangement fees
4. Lender’s valuation of the property (this is the ‘drive by’ valuation)
5. Solicitor’s fees involved in the mortgage.

These of course added up to a considerable sum especially the mortgage interest.   This is seen by many as not just a change to be aware of but so significant that unless swift decisive action is taken it could render the buy to let investment case less than compelling. In a phased approach landlords will be losing tax relief on their buy to lets.

Since April 2017 the tax relief has been phased out and by April 2020 will be gone entirely.

 

Tax year	Proportion of mortgage interest deductible under previous system	Proportion of mortgage interest qualifying for 20% tax credit under new system
Prior to April 2017	100%	0%
2017-18	75%	25%
2018-19	50%	50%
2019-20	25%	75%
From April 2020	0%	100%

The Government stated:

Individuals will be able to claim a basic rate tax reduction from their Income Tax liability on the portion of finance costs not deducted in calculating the profit. In practice this tax reduction will be calculated as 20% of the lower of the:

• finance costs not deducted from income in the tax year (25% for 2017 to 2018, 50% for 2018 to 2019, 75% for 2019 to 2020 and 100% thereafter)
• profits of the property business in the tax year
• total income (excluding savings income and dividend income) that exceeds the personal allowance and blind person’s allowance in the tax year

Any excess finance costs may be carried forward to following years if the tax reduction has been limited to 20% of the profits of the property business in the tax year.

I do recommend you sit down with a spreadsheet or your accountant and do some specific maths to calculate your change in yield but for a higher rate tax payer (40%) and with a 75% LTV mortgage the difference between April 2017 and April 2020 is staggering. One landlord on this site reported a 35% drop in profit on his buy to let.

Enough of the doom and gloom.  What can you do about it?

Brokers will tell you about the added efficiencies in finding a better mortgage rate to offset spirally costs elsewhere. That is fair enough but you should be doing that anyway.   The answer is a legal one.

Run your buy to let properties through a limited company.

The reason for this is that you will pay corporation tax not income tax.  Which by 2020 will be just 17%.  I have assumed you are higher rate tax payer and if that is not the case then these sums may be off and you must consult independent accounting advice to get some clarity on the differential.

What is a limited company?  

The term appears as a suffix that follows the company name, indicating that it is a private limited company. In a limited company, shareholders' liability is limited to the capital they originally invested. If such a company becomes insolvent, the shareholders' personal assets remain protected.

A few words of caution:

Before you start registering your company online please pause for further thought.  Having a limited company may be the right solution and vehicle but in order to get your current portfolio into the company you would need to transfer them which means sell them.  The company is a separate legal person in law so the transfer to the new legal person would be like selling to anyone else and you would/could find yourself liable for:

1. Capital Gains Tax
2. New Stamp Duty
3. Legal costs
4. Depending on your lender(s) – early repayment costs.

The first one is the most concerning.  Capital Gains Tax for residential property sits at a whopping 28%.  If you have owned your properties for some time and ridden the wave upwards then well done but triggering a 28% tax liability to save a percentage elsewhere in the reduction to corporation tax from income tax needs to be properly and professionally considered.

The above is not intended to invalidate the legal solution, but rather to make you aware and perhaps it is the case that your current investment properties stay where they are and only new properties you acquire and born into a limited company from day one.