Mortgage Rate Relief. Should Medway Landlords Use A Limited Company?

Hello Readers,

If you ‘ve been a property investor for the past couple of years, you will have heard about the section 24 tax changes which have been phased in by the Government. These tax changes have dramatically changed the structure of the buy-to-let landscape with portfolio landlords turning to a limited company structure so as to avoid the raid on their pockets.

Something I discuss quite regularly with investors is whether they should turn to a limited company or purchase in their own name and the answer is completely dependant on their goals.

What Are The Changes?

As of April 2020, landlords have not been able to deduct any mortgage expenses from rental income to reduce their tax bill (for properties owned in their name and let out). Prior to this, the full cost of a mortgage could be deducted as a legitimate business expense. I first wrote about this back in 2018!

The new system means that landlords received a tax credit based on 20% of mortgage interest payments and, whilst for basic rate taxpayers, apart from the additional admin this doesn’t make much difference, however higher rate taxpayers will feel the impact as they previously effectively received 40% relief on mortgage payments.

This new system was phased in from 2017 and the table below outlines how this was done.

Here’s an example calculation of how the payments break down for a rental income of £1,000 per month with a £600 interest only mortgage per month:

  • Tax is paid on the full £12,000 rental income they earn
  • £7,200 in mortgage interest is paid
  • A tax credit of £1,440 is received (£7,200 x 20%)
  • A basic rate taxpayer will pay £960 (no increase compared to the old rules)
  • A higher-rate taxpayer will pay £3,360 (double the amount payable under the old system)
  • Profit after tax for a basic rate taxpayer will be £3,840 (£320 per month)
  • Profit after tax for a higher rate taxpayer will be £1,440 (£120 per month)

The sting in the tail is that because the whole rental income is now taken into account (rather than the net after expenses), a large number of people have been pushed into a higher tax bracket.

Limited Company Or Personal

This is a something I regularly discuss with investors and, as mentioned above, whether you will be purchasing with a limited company or personally does entirely depend on your individual goals.

Investors who plan to build a portfolio of over two properties are generally more efficient purchasing with a limited company, however for those looking to purchase just one or two are likely to find that buying personally will be more efficient.

Here’s a very approximate illustration that will outline hopefully a helpful comparison. You’ll see how, based on this rough calculation, owning five properties leaves you better off purchasing through a company, whereas just one leaves you worse off.

I have assumed that, for the property purchased in a personal name, the single property (A) does not push you into the upper tax bracket, however five properties (B) does.

This illustration also takes into account the fact that a mortgage through a limited company is more expensive that as an individual.

Whilst I’m certainly not an accountant so the above illustration is approximate, you’ll see how it’s so important to get the foundations correct when investing in property and, for new investors, this is a crucial thing to consider. You may also find it interesting to see how purchasing as an individual can, sometimes, actually be a better option!

Obviously things like capital gains tax benefits of a limited company and releasing equity may swing the benefits towards a limited company, however for a straightforward let this illustration should help paint a picture.

My advice is to always speak with a property specialist accountant before making any decisions on how you are going to structure your investment as tting the foundations right is so very important.

I trust that you found this article helpful! I’d also be keen to hear any thoughts or comments you may have from your own experience that would potentially add to the input here. Please do feel free to reply to this email and i’ll be in touch!

Hasan

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