buy-to-let house
Written by Nick Moulds on 31st January 2019 in Business Growth Finance General Tax

When setting up your buy-to-let business you need to consider whether to hold the property personally or whether a limited company may be more suitable.  To understand the issue better, first, let’s look at the rule changes that began to phase in from April 2017.

What are the changes?

From April 2017 to March 2018, deductions from property income are restricted to 75% of costs, with the remaining 25% available as a basic rate tax reduction. This will change from 2018 to 2019 to a 50% deduction / 50% basic rate tax reduction. The following year, this will end up as 25% cost restriction and 75% tax reduction by 2020 before finally moving to a 100% basic rate tax reduction in 2021.

As such, landlords can no longer deduct all their finance costs from their property income and will instead receive a basic rate deduction from income tax. 

Will this affect limited companies also?

No.  These changes don’t apply to limited companies and as such, many buy-to-let landlords have jumped ship and transferred their properties into a limited company.

So should you do the same? 

Before making that decision it’s important to consider the following advantages and disadvantages.

Advantages include:

  • Limited companies are not affected by the aforementioned withdrawal of tax relief for finance costs – mortgage interest etc.
  • If you are able to retain surplus profits inside the company, the only tax payable is 19% corporation tax.
  • The company can claim indexation relief if it makes a subsequent profit on the sale of a buy-to-let property. This relief is no longer available to individuals.

Disadvantages include:

  • Additional personal tax to pay, usually income tax but also capital gains tax, if you withdraw funds from the company for personal use.
  • Additional professional support costs required to cover the filing of accounts and tax returns etc.
  • Stamp duty may apply if you transfer current buy-to-let properties from your own name into a company structure.

I’m still not sure what to do:

This isn’t an easy decision and it’s important to note that if you already own buy-to-let property it will likely cost you in stamp duty and/or capital gains tax if you transfer these properties without undertaking significant tax planning.  At Moulds & Co Accountants we understand the risk involved and the necessity for thorough tax planning. 

This is not a route we would encourage without a thorough examination of the downside tax risks and the strategies that would need to be employed to reduce or eliminate these charges.

How we can help – Starting a new buy-to-let business as a limited company and transferring a current buy-to-let business into a company structure is a completely different situation. Fully understanding the tax risks and other dangers involved is essential. We would recommend seeking professional advice before proceeding.  Our professional and experienced team at Moulds & Co can help guide you through your decisions and ensure you choose what is right for you. Call us today on 01937 584188 to hear how we can help.

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