Can a buy to let company beat landlord tax changes?

Chancellor George Osborne dealt a blow to the fortunes of buy to let investors with a surprise announcement slashing finance interest relief – but many investors are asking whether trading as a property company can beat the new rules.

Over the next four years, finance interest relief is phasing out for higher rate taxpayers.

As a result, they will lose more than half of their tax relief on buy to let mortgage interest. From April 2020, maximum tax relief on finance interest will be 20%.

Note the rules apply to ‘finance interest’, not just mortgage interest, so other types of borrowing are also covered.

The change does not apply to property companies, which will still claim relief at the proposed marginal corporation tax rate of 18% in 2020.

So, on face value, trading as a property company will do nothing to restore the differential.

Hidden costs of property companies

Other issues also affect trading as a property company –

  • Transferring buy to let homes into a company triggers capital gains tax on the full market value of the properties as unlike a trading business, property investment does not qualify for incorporation relief to negate the tax charge
  • Buy to let mortgages are also harder to come by for companies – specialist lenders will let companies borrow to buy letting property, but the rates and charges are often higher than personal borrowing
  • Taking profits as dividends will also be hit by new tax rules. The first £5,000 of dividends will be tax-free, but higher rate taxpayers will pay extra tax on any dividends they draw above that amount
  • Setting up and running a company costs more than personally letting property. Companies must file more complicated accounts and deliver returns to Companies House each year which increase running costs. Expect to pay between £1,000 and £2,000 a year to an accountant for these services

It’s not all bad news

For expats, trading as a property company does have one bonus – as the company is UK resident for tax, the non-resident landlord scheme does not apply, so the company is exempt from the onerous rules of having income tax deducted at source by a letting agent or tenants.

Another advantage of trading as a property company is the director loan account. Tax rules allow directors to borrow up to £10,000 from their company without paying tax on the cash. The account works like a free bank overdraft, but as soon as the £10,000 limit is breached, tax is due on the whole amount outstanding unless it is repaid within a short timescale.

The Chancellor seems to have done his homework – higher rate taxpayer cannot easily work around the new finance interest rules with a property company.

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