One of the main benefits of getting a buy-to-let company mortgage through a company is that costs associated with running the buy-to-let can be deducted from earnings to reduce the overall tax bill.
Costs that can be deducted include insurance, repairs and, crucially, mortgage interest.
Tax changes brought in from 2017 stopped individual landlords from deducting mortgage interest to lower income tax bills, which is why more landlords started to set up limited companies for owning properties.
And instead of paying income tax on rent earnings, limited companies pay corporation tax on profits at a rate of 19%, which is especially beneficial if you’re a higher rate taxpayer.
For example, a limited company landlord who has £24,000 of rental income and pays £7,000 of mortgage interest will be liable for corporation tax at a rate of 19% on £17,000 (that’s (£24,000 minus £7,000). That means a tax bill of £3,230, leaving a profit of £13,770.
A higher-rate taxpayer landlord who has the same £24,000 of income and £7,000 of mortgage interest will be liable for income tax at a rate of 40% (£9,600). They can claim tax relief at a rate of 20% on the lowest of either the finance costs, property profits or adjusted total income – in this case, the lowest amount is the mortgage interest (£1,400). This leaves a tax bill of £8,200 and a much lower profit of £8,800.
However, there is a further tax that needs to be paid to draw down profits out of the company as dividends. Rates on a limited company buy-to-let mortgage can also be more expensive than a standard buy-to-let mortgage.
A limited company has to pay stamp duty, with the tax also due when any properties currently owned are sold or transferred to the company. Furthermore, property held by a limited company is liable for Capital Gains Tax, and there is no tax-free allowance which individuals do benefit from.
It is a good idea to see a tax adviser to help work through the options and whether setting up an SPV is the right option for you.
