How Landlords Could Reduce Tax Bills

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June 25th 2022
Tax Week 12
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How Landlords Could Reduce Tax Bills

In a few days tax bills for landlords will begin an upward journey - we examine the effects and possible solutions.

Starting April 2016 measures to reduce the level of buy to let investment began. Firstly stamp duty for any secondary home purchase was raised to three percent above the amount paid for regular primary home purchases. What this effectively did was remove the zero percent stamp duty bracket altogether for investment properties and has contributed to a 50 percent slowdown in the growth of new property purchases by landlords. April 2016 also saw the '10%' wear and tear allowance removed and only actual costs allowed to be claimed through normal processes and the replacement furniture relief.

The new 2017 tax year starting this Thursday will set out the first phase in the removal of mortgage interest as a cost landlords can claim tax relief upon. Eventually full mortgage interest tax relief will only be available to basic rate taxpayers, with it capped to 20 percent for the remainder. We produced a buy to let calculator here to help illustrate the changes tailored to a landlord's portfolio.

The tax changes discussed apply to property purchased by a private individual but the other way of wrapping investment property is through a Limited Company. A Limited Company is subject to the new reduced 19 percent Corporation Tax on profits but profits can be reduced by costs including the full mortgage interest costs. Profits extracted from the company can take the form of dividends, which are subject to lower rates of income tax and have a £5,000 allowance (although this too will reduce to £2,000 in 2018).

Directors providing personal funds in order to purchase property, by way of house deposit, may also be able to claw the money back tax-free from the company as it could be classed as a Directors Loan to the company.

On the incorporation side of the fence it isn't all rosy however, with increased paperwork and disclosure associated with companies, lack of capital gains allowance when trimming the portfolio and the increased difficulty of securing lending. It really is only an option for new property purchases where the finance required will be low enough to secure rates on par with non-company mortgages.

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