Over the last few years, we have seen a huge shift towards investors buying investment property through limited companies. This has been driven by changes to the mortgage tax relief rules. From April 2020, private landlords can no longer deduct their mortgage expenses from the rental income to reduce their tax bill.
This has resulted in landlords seeing a considerable reduction in their after-tax profits. As Limited companies can treat mortgage interest as a cost, and corporation tax and dividend tax rates are much less than the income tax rate for higher-rate taxpayers, many private landlords are setting up limited companies.
Another benefit of purchasing through a limited company is around inheritance tax. If you were to pass a property portfolio down to family members via a limited company, you could avoid large amounts of inheritance tax.
Private landlords can no longer deduct any mortgage fees from their rental income to reduce their tax bills. Instead, they received a 20% tax credit based on mortgage interest payments.
If you are paying a higher tax rate, ditioyou will be unable to claim all the taxes paid against your mortgage because the credit line is only refunded at the basic tax rate and not the highest tax rate you paid. In addition, you may also find yourself being pushed to the next tax bracket because you need to declare the income used to pay the mortgage on your tax return.
Unlike private property, mortgage interest is treated as a limited company's business expenses, so you can deduct that expense before paying corporate taxes.
For private landlords, profits from rental income are taxed together with other income through income tax.
|Tax Band||Income||Tax Rate|
|Basic Rate||£12,501 to £50,000||20%|
|Higher Rate||£50,001 to £150,000||40%|
|Additional Rate||over £150,000||45%|
Currently, the standard personal allowance is £12,500 If you invest in property through a limited company, you will need to pay corporate tax on your profits.
The corporate tax rate is currently 19%, but by 2023 it will rise to 25%. If you are a taxpayer with a high tax rate, you can potentially save a lot of taxes. If you want to earn rental income, you will still be taxed, whether through income tax on your salary or dividend payments.
We always recommend taking advise regarding tax and limited companies set up from a registered Financial Advisor. If you would like to speak more about this, or any of our investment opportunities, simply fill out our enquiry form.