Buy to Let Landlords accounting services in Greenford, Perivale, Northolt & Ealing

Private landlords can no longer deduct their mortgage expenses

Private landlords can no longer deduct their mortgage expenses from the rental income to reduce their tax bill. This has resulted in landlords seeing a considerable reduction in their after-tax profits. Because limited companies can treat mortgage interest as a cost and corporation tax and dividend tax rates are much less than the income tax rate for higher-rate taxpayers, many private landlords are considering setup up a limited company.


Tax treatment of profits

For private landlords, profits from rental income are taxed via income tax alongside their other earnings. Income above your personal allowance is taxed at the following rates. Currently, the standard personal tax-free allowance is £12,500 (although this reduces if your income is over £100,000).

Tax BandIncomeTax Rate
Basic Rate£12,501 to £50,00020%
Higher Rate£50,001 to £150,00040%
Additional Rateover £150,00045%

If you invest in property via a limited company, you will be liable for corporation tax on your profits. The corporation tax rate is currently 19%, but is set to rise to 25% by 2023.

If you are a higher-rate taxpayer you stand to make an enormous tax saving.

You will still be taxed if you want to access your rental income, either via income tax on the salary you pay yourself or tax on dividend payments. More on this later when we look at the tax you’ll pay when you take your money out of your company. However, there are ways a tax accountant can minimise the tax you pay.

Tax treatment of mortgage interest

Private landlords can no longer deduct any of their mortgage expenses from rental income to reduce their tax bill. Instead, they receive a tax-credit, based on 20% of their mortgage interest payments. If you are an additional or higher rate taxpayer you won’t get all the tax back on your mortgage payments as the credit only refunds tax at the basic rate and not the top rate you paid. Further more, you may also find yourself pushed into the next tax bracket because you’ll need to declare the income that was used to pay the mortgage on your tax return.

Unlike privately owned property, mortgage interest is treated as a business expense for limited companies, so you can deduct the cost before paying your corporation tax.

Inheritance tax benefits

Landlords planning to pass their property portfolio down to children or family members could avoid large amounts of inheritance tax by buying the property through a limited company.


Mortgage availability

The number of buy-to-let mortgage products on offer for limited companies is must lower than for individuals. You may find it more difficult to arrange a mortgage, and the interest rates may be higher.

Tax when you take money out

To access your rental income, you can pay yourself a salary. This will be liable to income tax but will count as a cost when calculating your pre-tax profit for corporation tax purposes.

Rental profits taken as dividends are not considered a business expense. For tax year 2020-2021, the tax-free allowance on dividends is £2,000. How much tax you pay on dividends above this amount depends on your tax band. The following dividend rates apply.

Tax BandTax rate on dividends above the allowance
Basic Rate7.5%
Higher Rate32.5%
Additional Rate38.1%

If you plan to leave the rental profits in the company, this is not a problem. However, if you need to live off your rental income, we’ll need to do the maths to work out whether a limited company reduces your tax bill. Speak to us as there are ways you can maximise your tax-efficiency, such as distrusting dividends to a spouse who is a basic rate taxpayer.

Transferring any properties you own in your own name is costly

It is not just a case of forming a limited company and transferring your property by signing it over. You must sell your property to your new company, and this will attract some costs, for example:

  • Capital Gains Tax – If the property you own has increased in value over the years, you will be liable for Capital Gains Tax (CGT) on that profit
  • Stamp Duty Land Tax – Just like property bought by an individual, your limited company must pay Stamp Duty Land Tax and the 3% second home surcharge
  • Conveyancing and legal fees – You will need to pay a conveyancer to undertake the legal work of transferring ownership to your limited company
  • Early redemption charges and increased mortgage costs – If the mortgage on your buy-to-let property is still in the early repayment charge period, then you will have to pay this charge.

For some landlords, these costs make moving to a limited company prohibitive. For others, the long-term tax savings out-weigh these costs.


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