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Limited Company or own name?

26/03/2018

This month, our guest post from Alan Crawford from Lyndhurst Accounting has shared his expert advice for buy to let property owners.

 

For those of you with a single or maybe several buy to let properties in your own name, you will be only too aware of the recent tax changes which will ensure that, by April 2020, you will only be able to obtain tax relief at a rate of 20% on your mortgage interest. These new rules have been phased in from April 2017 so many of you will see the effect of it for the first time when you submit your 2017 – 2018 tax return.

 

There is no problem if your marginal tax rate is 20% but, with the revised way that the rental income will be calculated, it is highly likely that many of you will become 40% taxpayers without realising it. Those who will suffer the most will be higher rate taxpayers and those just under the higher rate prior to the addition of the rental income. Their situation is exacerbated if their borrowings are high.

 

What can you do?

 

For those with existing properties, you can take one of 3 actions:

  1. Do nothing. Accept your lot and simply appreciate that your tax will go up and your net return will decrease.
  2. Sell your properties. Many are doing this perhaps with the thought that house prices are not going to increase that much further or may even decline.
  3. Transfer your properties into a limited company. Not easy and likely to be expensive either in specialist fees or in stamp duty and CGT.

Let’s assume, however, that you are either a first time buyer in the buy to let market or wishing to add to your portfolio. Do you buy that property in your own name or do you form a company and buy the property through the company? My advice depends upon your intentions.

 

Consider these questions:

  1. Are you intending to hold the property long term (say more than 5 years)?
  2. Are you a higher rate tax payer or likely to be when rental income is added to your taxable income?
  3. Do you want to have more control over your personal taxable income and how much tax you pay?

If the answer to any of these questions is YES then due consideration should be given to buying that property in a limited company. The advantages are as follows:

 

  1. Potentially very large tax savings
  2. Full relief for mortgage interest
  3. Total control over how much income you release from the company to yourself
  4. Corporation tax rate of 19% reducing to 17% in 2020 (as opposed to 40% personal higher rate).

There are some disadvantages but if you have answered YES to the above questions then these are far outweighed by the benefits that you will receive.

 

It is a big decision. Do not take it lightly. You really do need to go through the figures and potential savings to determine what is right for you in your particular circumstances.

 

If you have any questions or concerns please do call me on 0117 9625829 or e-mail me at alan@lyndhurstaccounting.co.uk

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