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HomePropertyBuying Selling and Renting PropertyCan Landlords Beat the Taxman by Setting Up a Limited Company?

Can Landlords Beat the Taxman by Setting Up a Limited Company?

Photo by Towfiqu barbhuiya on Unsplash

Actually ‘beating’ the taxman outright is not something anyone can realistically do, at least not in the legal sense.

But there are effective ways to at least reduce the amount of tax you are liable for, depending on your circumstances.

For example, many of those operating as buy-to-let landlords have fallen victim to the government’s relentless tax crackdown over the past few years. More landlords than at any point in recent history have been liquidating their assets as of late – a sixfold increase in the number of BTL portfolios changing hands.

Investors in record numbers are bailing on the sector entirely, just as others are fighting tooth and nail to snap up their properties. The UK’s private rentals sector is performing as strongly as it ever has and average monthly rents across the country are at all-time highs.

In which case, why is it that some investors are desperate to get into the BTL sector, just as others are beating a hasty retreat?

The answer, in many instances, lies in the way many so many landlords are setting up buy-to-let companies. And in doing so, gaining access to tax advantages that are not afforded to those who run more ‘conventional’ buy-to-let businesses.

Corporation Tax vs. Income Tax

In the past, landlords were able to offset interest payments on their mortgages against their tax bills. In April 2020, this allowance was reduced to a mere 20% tax credit.

However, where a landlord owns and operates a BTL business in the form of a limited company, they are still able to offset all of their interest. In addition, corporation tax is payable at a standard 19%, compared to the 40% income tax paid by higher-rate earners.

These two factors alone are playing directly into the pockets of those who are able to (and know how to) take full advantage of them. The importance of which has never been greater, given how interest rate hikes look set to make it even more difficult to turn a profit as a private BTL landlord.

Further Interest Rate Increases on the Horizon

Landlords who hold properties in their own names (rather than buying through a limited company) are set to be hit particularly hard by any further interest rate hikes. Average buy-to-let mortgage rates are currently hovering around 4%, meaning that a landlord with a portfolio of 12 mortgaged homes generating £100,000 in rental income will earn around £27,800 in profit each year, after paying £28,200 income tax.

This would mean that if interest rates were increased to 6% – which is entirely plausible – their annual profits would be slashed to a mere £16,200.

Meanwhile, an identical property portfolio registered and let out under a limited company would result in an annual profit of £31,185, under the same circumstances and with the same 6% interest rate.

There is also a significant stamp duty benefit for those who purchase properties via a limited company. Where a landlord purchases a property under their own name, there is a 3% additional home surcharge on standard stamp duty rates.

By contrast, buying properties as a limited company carries a 0.5% surcharge.

This means that if a landlord purchases four properties under their own name valued at £250,000, their stamp duty bill would be £40,000. If a limited company was used to purchase the same properties, the stamp duty bill would be just £5,000.

Even so, purchasing properties via a limited company is not the most profitable approach for all landlords. It depends entirely on the size of the investor’s portfolio and their overall income level, along with other affordability factors.

Independent expert advice should therefore be sought, before making any major decisions regarding the purchase of buy-to-let homes in the current climate.

 For more information on any of the above or to discuss the benefits of bridging finance in more detail, contact a member of the team at Bridgingloans.co.uk today.

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