Investors in buy to let properties are selling these properties back to themselves to get around the recent tax changes by the UK government. Landlords face higher costs as the buy to let tax relief is being phased out starting in 2017. As a landlord you will be affected by these changes if properties are registered in your name but smart landlords are now using limited companies to buy and hold properties which will mean that they will pay less tax in the long run.
The reason that the government has made these buy to let tax changes is that it believes that landlords are competing with first time buyers to much for the limited amount of properties that are on the market. So buy to let tax relief will be capped starting in 2017.
The Current Situation And Proposed Changes
Currently a private landlord can claim tax relief back on the mortgage interest that they pay at the same rate that they pay income tax. This means that if a landlord has a buy to let mortgage costing £1,000 a month then they can claim up to £450 back depending on their tax grade.
With the new rules in 2017 this will be reduced to just £200 by the year 2020. This will leave landlords out of pocket by £250 a month to cover their mortgage costs. But by setting up a limited company and selling their properties to that company, taxes on these expenses can be avoided completely.
The costs of running their buy to let properties can be claimed as “allowable expenses” and this will effectively write off the cost of mortgage payments, letting agent’s fees, wear and tear, maintenance and so on.
With their buy to let properties in a limited company UK landlords will have to pay corporation tax at a rate of 20% on the taxable profits that they make but this rate is going to fall to 18% by the year 2020. A number of mortgage brokers have reported that landlords have been purchasing new properties through limited companies for the past year.
Should You Set Up A Limited Company To Buy Back Your Properties?
There are certainly tax advantages to doing this but there can also be some so high costs that are associated with it. When you sell a buy to let property and repurchase it through a limited company you can be liable for capital gains tax if the value of the property has increased since it was purchased originally.
The amount of capital gains tax to be paid will depend upon the tax rate of the landlord and this is 18% for a basic tax payer and 28% for a higher tax payer. There will also be stamp duty to pay when the company repurchases and there has also been a recent surge of 3% on stamp duty that is owed.
You will have to change the mortgage contract as well and there may be repayment charges associated with this. Also there could be another valuation fee to pay as well as legal fees. You need to calculate if the long term gains will be worth making the switch to a limited company owning your properties.