Your home may be repossessed if you do not keep up your repayments on your mortgage
Should you Buy using a Limited Company option?
Over the last few years many tax changes have been brought in specifically aimed at investment/buy to let properties. We suppose this was in an effort to steady the rising house prices and give residential buyers a slight advantage without raising rates across the board. A Limited Company thus becomes a buffer between you and HMRC. And the application process is similar to a personal purchase, but with the added potential tax benefits.
We all know the Stamp Duty surcharge that has been imposed but also the way the rental income is treated.
Previously for example if you had a rental income of say £1,250pm and monthly mortgage interest of say £1,000pm leaving you with £250 surplus, then only £3,000 (£250×12) would have been added to your annual income (presuming no other costs). And tax would be paid accordingly. This was using the Mortgage Interest Relief At Source (MIRAS) scheme. Some of you may remember when this applied to your main residence!
So if you were earning £45,000pa plus this £3,000pa rental income, the £48,000 total would still put you in the basic rate tax bracket.
Under new rules the gross rental income (minus costs except interest) would be added to your income. So in our case, a figure of £15,000 (£1,250×12) will be added to your income of £45,000, meaning your annual income is now £60,000, and you are now in the high rate tax bracket and your tax bill is likely to be higher. So for example where previously you may be able to write off £5,000 in mortgage interest and only add the net profit to your income for tax purposes, since 2020/21 you only get a 20% flat credit for interest towards your tax bill.
You will receive a 20% tax credit and therefore those who are still zero or basic rate tax payers after rental income, may not be affected. Higher rate and Additional rate tax payers will have a further liability.
These new rules were implemented in 25% steps commencing from the 2017 to the 2020 tax year. So where in the past you could write off 100% interest and only pay taxes on the actual profits, since 2020 although you will receive a tax credit at 20% towards the interest cost, the full gross rental income will be added to your overall income. If this changes your tax band, you could potentially pay taxes despite making an actual loss!
The types of expenses you can still claim are items like receipted expenditure for maintenance, letting fees and other associated property costs.
Limited Company
Many people without taking suitable advice are opting for this route. As always we strongly advise you speak to your accountant or other suitably qualified tax advisor to ascertain your overall tax situation.
A limited company pays corporation tax and the tax thresholds are far higher than for personal income. This means rent that is received and retained within the company will only pay the corporation tax on profits and there is no further personal liability including National Insurance costs.
Furthermore, all the mortgage interest can still be claimed as this is treated as a business expense. Many people are opting for the limited company route purely for this option, which in itself may not be beneficial.
The interest rates offered by many lenders for such purchases tend to be higher. So if the net rate you are paying after tax relief is still higher than what you would have paid anyway, than what’s the point? Thus it is important to utilise a suitable product option with an appropriate lender.
Plus the lender’s product fee will be higher and you may also need to pay extra legal costs for matters such as independent legal advice, personal guarantees and debentures. As well as extra accountancy fees for managing the limited company. And you will pay a higher rate of stamp duty. Also at the moment not all lenders entertain limited companies and thus product choice and criteria can be a slight issue.
But for many the advantages can be beneficial. For example allowing the income to roll up within the limited company where the tax treatment may be more favourable. Inject capital directly from other companies/businesses without withdrawing it first, succession planning allowing you to alter the company structure (with the lender’s permission) and so on. Also going forward more lenders are joining this arena giving us access to greater options as well as offering lower cost Limited Company products with lower background fees.
As always, things change and so watch this space! At Max Mortgages we are here to help customers benefit from any criteria or legislation changes when they happen.
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