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Tax Relief Cuts? How Landlords Can Protect Profits as a Limited Company
Gareth Hill 17th July 2015 In the Press
Changes to the tax relief on buy-to-let mortgages, as announced by Chancellor George Osborne as part of the summer budget, will mean that landlords will only be able to claim against interest payments at the base rate of 20%, as opposed to their marginal rate which, for higher earning landlords, could be as high as 45%.
It is, of course, a major shift, presenting a challenge to those investing in the property rental market and a requirement to adapt in order to protect that ever-important bottom line.
So, What’s Changed?
Whilst the proposed cuts won’t happen in one fell swoop, being phased in over a three year period between 2017 and 2020, the announcement does mean that landlords need to make adjustments to avoid losing out when the new changes are applied.
Certainly the changes will require all property investors to factor in the changes when working on the budgets of their own portfolios. More than that however, is the need to look at alternative ways in which to organise your business to take advantage of other options available which could offset the tax relief cuts.
Go Limited
One way in which we would encourage investors to look, in light of these budget announcements, is towards the possibility of investing as a limited company.
The Tax Relief cuts are targeted specifically towards individuals with a property portfolio (whether that be just one property or many) whereas limited companies are not affected by the proposed changes. This in itself should make the idea of setting up a limited company for your property investments a viable, and potentially attractive proposition.
However, there is further incentive to head along this route if you’re looking to make the most of your investments in the coming years.
Corporation Tax Reductions
Whilst the Chancellor announced the tax relief cuts in his budget, there was also the fairly significant announcement that corporation tax is going to be reduced – also starting from 2017 – from its current 20% down to 18% by 2020 (reducing by 1% each year).
Taking this on board, it’s easy to see why going limited may be the best option for landlords to take. Not only are you removing your properties from the firing line of the tax relief cuts but you are moving them towards a potentially much more cost efficient tax structure.
The Practicalities of a Limited Company
The first thing that should be noted is that a limited company isn’t just the preserve of the big players with a portfolio of many properties. In fact, you can set up even if you’ve only invested in one property.
As a limited company you are taxed on the profits of your business, in this case, the profits you have made on your property / properties. And, given the reduction in corporation taxes versus cuts to individual’s tax relief, come 2020, your profit after tax (which you can withdraw as periodic dividend payments) as a limited company could be significantly higher. Indeed, as Nicole Blakemore reports in The Telegraph, a move to a limited company would now have to be the recommended route for landlords to not only preserve their profits but also offer the potential for better growth in the future.
As Chartered Accountants Blick Rothernberg have noted, in light of the recent budget announcements, taking your property portfolio down the route of private company may well become the favoured pathway for many buy-to-let landlords and investors.
Gareth Hill 17th July 2015 In the Press