Will buy-to-let still make financial sense?

A series of changes in tax law had already dented the popularity of the buy-to-let market. Government measures brought in during the COVID-19 situation may be prompting landlords to question if residential property investment still makes financial sense.

14 April 2020

The income tax relief that landlords used to be able to get on mortgage interest finally disappeared altogether from 6 April 2020. It was replaced by a basic rate (20%) tax credit. While tax credits can reduce your tax bill, they don’t reduce your income threshold and some landlords may face losing child benefit or their tax-free personal allowance as a result.

This follows the end of the wear and tear allowance, the introduction of 3% additional stamp duty on purchases for landlords, a ban on charging letting fees to tenants and a new cap on deposits. The case against being a landlord also includes the high capital gains tax charges on let property (18% or 28%).


Is incorporation the answer?

If you’re keen to continue as a residential property landlord, it might be worth converting your rental business to a limited company. The main attraction is that companies get full relief for any mortgage interest paid, as well as paying corporation tax at a much lower rate than higher rate income taxpayers.

However, it’s worth bearing in mind that net rental income belongs to the company, and directors are remunerated by dividend and/or salary, so they are potentially subject to a second layer of taxation. Furthermore, transferring rental property into a limited company will usually incur stamp duty land tax and possibly capital gains tax. On the plus side, income from residential letting is usually exempt from VAT.

Landlords should also remember that incorporation means certain legal obligations, including preparing and filing annual accounts and submitting a corporation tax return. In addition, banks typically offer mortgages at a higher interest rate to companies.

Jess Burton, a mortgage, protection and equity release adviser for Anderson Harris says, prior to COVID-19, she had seen fewer individuals getting into buy-to-let property and confirms landlords were setting up limited companies. She adds: “There are still options for people who want to consider having a rental property, but there is just a lot more to think about now when purchasing an investment property, and getting the right advice is absolutely essential.”

Purchasing buy to rent residential property as a company, rather than as an individual, isn’t necessarily a quick-fix solution to the rental income tax relief changes. It needs careful consideration of all the costs involved to assess whether it makes commercial sense for a landlord.


Measures to protect renters and landlords affected by the coronavirus

In the meantime, the Government has introduced measures to protect renters and landlords affected by coronavirus. These include emergency legislation to suspend new evictions from social or private rented accommodation while this national emergency is taking place. In addition, there will be no new possession proceedings through applications to the courts during the crisis. Landlords will also be protected, as the three-month mortgage payment holiday includes buy-to-let mortgages.  For more information see here


Specific advice should be obtained before taking action, or refraining from taking action, in relation to this summary, if you would like advice or further information, please speak to your usual Shipleys contact.

Copyright © Shipleys LLP 2020

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