MENU

Let us help you with the buy to let dilemma

If you’re about to jump into the world of buy to let, you may be wondering whether to buy your property as an individual or through a company. Here we guide you through the tax implications of this dilemma.

Buy to let as an individual or a company?

In the 2015 Summer Budget, the Chancellor announced a reduction in the mortgage interest relief rate to the basic rate of income tax, to be phased in from April 2017. This came as a blow to individual buy to let investors who are also higher rate taxpayers, as they will face bigger tax bills once this change comes into force.

Consequently there has been an influx of questions from investors on the best way to manage their property
portfolios, in particular whether it’s better to hold property through a limited company.

Unfortunately there’s not a simple answer to this! Owning property as an individual or through a company is a
complex issue and the answer will depend on a number of factors.

Aims for your buy to let

The route you take will depend on your financial circumstances, your tax position and your objectives for the
investment, such as:

– Are you a basic or higher rate taxpayer?

– Will the property be used as a short-term gain or a retirement ‘pot’?

– Are you planning to buy a number of properties?

The reason these factors play such an important part in the decision is due to the differences in tax that you will pay as an individual or as a company.

Buy to let tax implications

Basic rate taxpayer

If you’re a basic rate taxpayer, it is generally more beneficial to buy your properties as an individual.

One reason for this is mortgage interest tax relief. Basic rate taxpayers will mainly not be affected by the reduction of relief from April 2017 and will continue to receive relief on their mortgage repayments at the level of tax they pay.

Individuals can also take advantage of the Capital Gains Tax Annual Exempt Amount, currently £11,100 per person per tax year. This exemption is only available to individuals.

Higher rate taxpayer

If you’re a higher rate taxpayer, it could be more beneficial to set up a limited company to hold your properties.
Limited companies’ profits are liable to Corporation Tax. Currently the rate is 20% and due to drop to 19% from 1 April 2017. This compares favourably to being taxed at 40% or possibly 45% as an individual.

However if you need to regularly withdraw funds from your limited company, rather than keeping your property
income as a long-term investment, then you should be aware that you will have to pay additional income tax on
annual dividends (currently over £5,000). See our blog on dividends for more info.

Company ‘v’ individual

So as you can see, there’s not a ‘one size fits all’ answer to the individual ‘v’ company
buy to let dilemma. Here are a few other points to consider:

– Although properties held under a limited company may be taxed at a lower rate, be aware that withdrawing funds from a company may incur additional tax

– Residential mortgages are generally cheaper and easier to obtain than commercial mortgages

– HMRC reporting requirements and admin for companies is more complicated than for individuals

– Companies will incur additional costs, such as accountancy and legal fees.

Be aware that tax rules can change and it’s important to speak to your accountant or tax adviser or call us on
01299 488860 to choose the best tax approach for you.

Our regular blogs bring you tax and accounting updates. Last time we focused on pre-trade expenses for new business owners.