Landlords are facing a tough 2016 with a double blow to their finances. First, there is the 3 per cent hike in stamp duty on buy-to-let properties which will add thousands to the purchase price from April next year.
Secondly, the tax relief on mortgage interest payments has been set at 20 per cent for everyone from April 2017. Previously higher earners could get relief at 40 per cent and taxpayers at the top end of the scale could claim 45 per cent. Although this will not affect landlords who pay tax at the basic rate, it will affect those on higher incomes.
The figures are not looking good. The Nationwide Building Society says a £150,000 buy-to-let mortgage on a £200,000 property which attracted a monthly rental of £800 would yield a net profit of about £2,160 a year. When the new tax relief rate comes into play in 16 months, the profit will plummet to just £960. Couple this with the increase in stamp duty and there are definitely some challenges ahead for landlords.
But there could be a way for the bigger landlords in the industry to soften the blow.
It is possible to set up a limited company for your buy-to-let business. This means you will pay corporation tax instead of income tax on any profits. With corporation tax currently set at 20 per cent, this is lower than income tax, particularly if you are one of the higher earners.
Another advantage is that you have limited liability which offers greater protection than that associated with being a sole trader. For example, you are only liable for the money invested in the company.
If you have more than 15 properties or form a company with other landlords so that together you have more than 15, you may also be exempt from the surcharge on stamp duty.
You can register your new business online at Companies House, which is fairly straightforward and the fee is relatively low. You will be required to submit your annual accounts to them and let them know of any changes to your company, such as new directors or employees.
There is some paperwork involved, such as filling in your corporation tax return, your self-assessment return, company accounts, PAYE salary scheme and a workplace pension if you directly employ staff. You may need to get an accountant to do handle this for you and, obviously, these additional costs need to be factored in when considering the up-side of setting up a limited company.
There are other considerations too. Firstly, your competitors will be able to find out more about your business and your profits by obtaining information from Companies House and other commercial sources.
Secondly, banks and other financial advisors may be not quite as willing to give you a mortgage. You will also need to transfer the properties to your company which may mean you are effectively selling the houses which could incur tax and stamp duty charges.
Before making any changes, it is definitely advisable to talk to your solicitor and accountant about the pros and cons of becoming a limited company.