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Buy-to-let: How landlords can cut their shock new tax bill



Private landlords who are facing losses following the Government's decision to cut tax relief on buy-to-let properties could protect their income by turning their rental activities into a business, experts have said.

The Chancellor slashed the tax relief that landlords in the top tax brackets receive on their mortgage interest payments, cutting it from the higher income tax bands, 40pc and 45pc, to 20pc by April 2020.

He claimed that this was to "level the playing field" and it was "unfair" that landlords enjoyed this tax perk but owner occupiers did not.

New analysis from accountants PwC has shown that if a private landlord transfers one or more properties into a company structure, known as incorporating a business, the total tax rate is greatly reduced.

"This is because a company is paying tax on the actual profit and therefore the rate does not fluctuate wildly. If the profit reduces, so does the tax," said Paul Emery, a tax partner at PwC.

"If the rental property is run privately, there is a scenario where because you no longer get full tax relief for your expenses, you can pay tax even if there is no profit," he added. "That means potentially enormous effective rates of tax."


By 2020, when interest rates are likely to be higher, the levy on a property worth £100,000 to a private landlord in a higher tax bracket - with an 85pc loan-to-value mortgage and a mortgage interest rate of 5pc - would be 106pc.

As a result they would expect to suffer an annual loss of £100.

If the same property were run as a business, the landlord would pay a tax rate of just 49.2pc and bank £888.

If mortgage rates go up further, the contrast becomes more stark.

If rates hit 6pc, a property owner operating under a business umbrella would again pay 49.2pc, but the private landlord would pay 186.7pc tax, and make an annual loss of £780, according to the PwC model.


"Other taxes such as stamp duty and capital gains tax could affect profits from a rental business, especially for a landlord with only a handful of properties," warned Mr Emery.

If the owner is a sole trader, he would pay stamp duty again on the "incorporation of the business" based on cost of the property.

But if the owner is in business with a partner, they could enjoy some stamp duty relief.

Alternatively, if a sole trader or business partners own more than six properties, it is classified as a commercial property business and they will only pay a flat 4pc stamp duty on the sale.

"The big tax difference is capital gains tax when the company finally comes to sell and dividend the profit to the owner at 49pc compared to 28pc for a private landlord - but at least you would know what your effective rate of tax is, and if you are reliant on the income rather than the appreciation of price, it may be a hit worth taking," said Mr Emery.

"Although incorporating your business helps you gurantee your monthly tax bill, it is not a magic solution. Tax is only one consideration when forming a company. For example, audited accounts might need to be filed," he added.


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