Becoming a buy-to-let landlord can open up great opportunities, but many are put off by some of the financial nuances of purchasing a buy-to-let property.
Purchasing your property as an individual or through a company can have radically different implications for your mortgage, fees and tax payments, and it’s important to understand what this distinction means for you.
With the self-assessment tax return deadline rapidly approaching, here’s everything you need to know to get the most bang for your buck in the buy-to-let market in the next tax year.
When it comes to your mortgage, buying a buy-to-let property through a company or as an individual has a serious impact.
If you buy your property through a company, your mortgage interest receives 100% relief against the property income for corporation tax purposes.
On the other hand, if you buy the property personally, your mortgage interest relief is restricted to just 25% being offset against the property income in the current tax year. It gets worse next year, you won’t get any mortgage interest relief at all. The interest that doesn’t qualify for this will be restricted to basic rate relief at either 20% of the remaining mortgage interest or the tax payable to HMRC on the rental income at the marginal income tax bracket.
While mortgage interest rates for businesses are often higher, the higher relief on offer can often leave you better off.
There are also tax implications for the income from your BTL property depending on whether you buy it personally or through a company.
If you buy the property through a company, your profits are subject to corporation tax, which currently stands at 19%. The only things that are taxable personally are any funds drawn from the company as dividends, which are taxed at special dividend rates of 7.5% for basic rate taxpayers, 32.5% for higher-rate taxpayers and 38.1% for additional-rate taxpayers.
If you buy the property as an individual, the profits are taxable based on the income tax band they fall in after any income you have from other employment. This means that the profits from your buy-to-let property could be taxed as much as 45% depending on how much your property brings in and how much you earn from elsewhere. This means that in many cases, buying the property personally could seriously add to your tax bill.
If you’ve already bought a buy-to-let property as an individual, you may at this point be thinking of transferring the property to a limited company to take advantage of the favourable mortgage and tax implications. However, this can be a costly process, as you’ll have to pay two sets of solicitors’ fees, capital gains tax on any profits the process creates and stamp duty land tax.
Sale of the property
It’s also important to consider the implications if you sell your property further down the line. If you’re selling your property through a limited company, any profits made on the sale of the property are liable for corporation tax of 19%.
Conversely, if you bought the property as an individual, an annual exempt amount of £12,000 is offset against any gains. Any remaining profit is taxable at 18% for basic rate taxpayers and 28% for higher or additional rate taxpayers. You may also qualify for relief if you’ve lived in the property at any point.
If all of this seems daunting, it can be useful to speak to an accountant who has experience of dealing with buy-to-let landlords to help you make the right decision for your own circumstances. One thing to note is that if you buy your property through a company, you may end up paying more in accountants’ fees as accounts and a corporation tax return need to be prepared.
However, whether you’ve already started your journey as a buy-to-let landlord or considering taking the first step on that journey, a good accountant will be invaluable in guiding you through the financial implications of the process and making sure that you’re not losing out.