When it comes to buying a property with an intention to buy-to-let, people may choose to buy the property in their name and be a private landlord/landlady or they can buy it by forming a limited company.
Buy-to-let could be an attractive investment option and in its very basic sense, it means buying a property, not for personal living but to rent it in the future. Renting a property is the investment made with the expectation to get back some returns every month in the form of rent. After April 2017, the benefit from the changes in the tax structure was visible and as people are getting more aware of the change in tax angle involved in renting a property, they are inclined to the option of forming a limited company for buy-to-let properties. Let us try to understand both the options in detail by looking at various aspects related to it.
Buying a rental property as a Private Landlord:
A private landlord is the one who chooses to own a rental property in his/her name instead of owning the rental property through a company.
If you are a to-be private landlord or an already one then you may want to consider the below points.
⦁ Private landlords pay income tax on the profit earned on buy to let property by deducting the allowable expenses from the rental income as per the tax bracket they fall into.
⦁ Since April 2020, as per Section 24, the landlords cannot deduct the mortgage interest and other financial costs such as mortgage arrangement fees from their rental income to reduce tax while calculating their tax liability. Instead, they now receive a tax credit, based on 20% of their mortgage interest payments and other financing costs. Due to section 24, some landlords may need to pay more tax if they fall into a higher tax bracket.
⦁ Private landlords are liable to pay Stamp duty Land Tax and a 3% surcharge on the purchase of additional residential properties.
⦁ With the current tax structure, private landlords have to pay Capital gain tax on the property at 18% if they fall under a basic rate taxpayer category. Otherwise 28% capital gain tax is applicable on the property if they are in a higher rate tax bracket.
⦁ Private landlords are solely accountable to pay compensation resulting due to any accidents caused by a fault in the rental property. In case of an injury to the tenant, the private landlords need to pay from their own pockets. If the compensation amount is big then it could mean breaking other investments to make up for the compensation amount. This will affect the investment goals to some degree.
Buying a property as a limited company:
The Landlords can buy a rental property by forming a Limited company as well. it is helpful to consider the below points if you are intending to buy a property by forming a limited company.
⦁ Once the landlord forms a limited company, they need to first transfer the property or if they self-own more than one rental property then they can transfer the ownership of all the properties by selling them to a limited company at a market rate subject to stamp duty. The limited company is the owner of all the properties.
⦁ For a legal transfer of the properties to a limited company the landlords need to pay fees to Conveyancer.
⦁ If transfer is happened by individual owner to his own limited company, then capital gain tax can also attract if profit on sale is above annual allowances limit. This can be avoided to sell own property at price that at lowest comparing available market valuation .
⦁ The profit is calculated by deducting the allowable expenses from the rental income.
⦁ instead of Income Tax, the limited company is liable to pay corporation tax on the profits made. The current rate for Corporation Tax is 19%.
⦁ Limited companies can deduct the allowable expenditure from the periodical rental income of the properties and calculate the company profits. Section 24 does not apply to limited companies. It means the full mortgage interest payment is tax available for deduction and it will reduce the profit, so ultimately decreasing the tax due amount. This is the main reason why more and more landlords are preferring the option of owning a rental property through a limited company.
⦁ The limited company need to pay Stamp Duty land tax and a 3% surcharge on the purchase of new residential property similar to the private landlords.
⦁ Limited companies have limited liability as compared to private landlords. In case of any accidents happens on the property the company is responsible not the landlord as an individual. This safeguards the personal finances of the landlord.
⦁ Limited company landlords have more administrative costs. A limited company need to disclose all the financial information each year and needs to complete self-assessment tax returns.
⦁ Limited companies hold an upper hand when it comes to paying the tax on the profit earned as they end up paying less tax as compared to Private Landlords which they can reroute to buy more buy-to-let properties to increase the investment portfolio.
⦁ Landlords can take the profit from a limited company in a way of salary, dividend or pension contribution.
⦁ Each director of a limited company is permitted to receive a yearly dividend allowance of £2,000 before the payment of tax (for this year 2021/22). After that, the profit is taxed at different rates depending on the tax bracket they fall into.
⦁ It is easy to buy a new property in a limited company. But there are a lot of tax implications for transferring an existing portfolio to a limited company.
The above information sheds light on various aspects pertaining to buying a property with an intention to buy-to-let. Every option has got its positives and negatives and by no means are we the experts on this subject to suggest one option over the other. People have to weigh in their options by looking at the current tax implications and number of properties they are holding with an eye on their future investment roadmap. We strongly suggest getting in touch with consultants who can study your case and suggest you the right option.