Incorporating a buy to let property business

Any buy to let landlord that presently claims a tax deduction for mortgage interest is likely to be adversely affected by changes in the tax rules from April 2017.

In previous blogs we have pointed out that from April 2017, finance charges (including mortgage interest) will gradually be disallowed as a deduction when computing a buy to let landlords tax bill. From 2020-21, all finance charges will be disallowed, and in their place, landlords will be able to claim a reduction in their tax due based on 20% of the finance costs disallowed.

This is a radical shift in the tax position of buy to let landlords especially those who are highly geared – they have borrowed heavily to expand their rental property portfolio.

Higher rate taxpayers will be denied full tax relief on their mortgage interest payments (they will be restricted to a basic rate deduction), and some landlords may find themselves paying tax at higher rates even though there may be no increase in their overall profitability.

What to do?

Initially, landlords should take advice to quantify the impact of these changes on their annual tax bills leading up to 2020-21.

Next, they should consider the effectiveness of incorporating their property business. Companies are not affected by these tax changes.

Not all buy to let landlords will benefit from incorporation. For some, the conversion and ongoing costs of incorporation will be more than any savings of additional income tax payable.

The change, from sole trader or partnership to a limited company, is not a process for the faint-hearted. It is something that must be planned carefully to avoid possible stamp duty and capital gains tax on-costs. Please contact us if you would like to consider the possible benefits of incorporation for your portfolio. The clock is ticking.