There has been an increase in the number of landlords who are incorporating or setting up a private limited company in order to avoid the negative impact of changes to the buy-to-let tax regime. Due to this, mortgage lenders are now offering more fixed products that are tailored to limited company landlords.
There are 235 fixed limited company mortgages in April 2018 compared to 212 in April 2017, 80 in April 2016 and 17 in April 2013.
Nevertheless, landlords need to be aware that switching to limited company status means paying higher interest rates than the rest of the buy-to-let market. The average two-year fixed buy-to-let mortgage rate currently stands at 4.29% for those who are applying as a limited company. This is 1.28% more than the rest of the market.
Changes to the mortgage interest relief explain why these higher rates may still appeal to landlords. Since 2017, buy-to-let landlords are no longer allowed to deduct the full cost of their mortgage interest from their rental income when they calculate the profit on which they pay tax.
From April 2018, they are only able to offset 50% of the mortgage interest. It will go down again next year and by April 2020, landlords will only be able to claim tax relief at the basic rate of 20%. Under the previous system, landlords would have qualified for up to 45% tax relief. However, these changes only apply to landlords who pay tax on an individual basis.
Profits of landlords who operate through a limited company are taxed at the corporation tax rate of 19%. Most importantly, limited companies can still deduct the full mortgage interest from their rental income for tax purposes.
Setting up a limited company is a big decision and landlords should take both mortgage and tax advice before going ahead.
If you require any tax advice, please don’t hesitate to ring our office at 01772 788200 or email info@taxexpert.co.uk.