Recently we mentioned the potential impact new tax laws could have on landlords looking to make a profit out of their rental properties. At present, landlords only pay tax on the profit that’s left after they have deducted their mortgage payments from the rent they receive on each property. However, the change in the law means landlords will soon end up paying tax on the turnover they achieve – i.e. the amount of rental income brought in on each property, rather than the actual profit.

But as is the case with many tax laws and rules, there is a way landlords can get around it without breaking the law. The new changes come into effect next year, but they only apply to landlords who own the properties in their own name. This means properties owned by limited companies are not affected.

More landlords making the change

It should perhaps come as no surprise then to learn there has been a spike in the number of landlords setting up their own limited companies. Many have done this already and essentially ‘bought’ properties from themselves by using the limited company to ‘sell’ to.

This has also led to a predictable spike in the number of limited companies applying for buy-to-let mortgages. This part of the process has been made easier thanks to an increase in the number of banks and other providers offering mortgages to limited company landlords as well as to individuals. Paragon Mortgages is just the latest in a line of providers offering affordable mortgage deals to professional landlords as well as more casual ones.

How does a limited company give a landlord a better deal?

The tax relief on mortgage interest is due to be scrapped next year. This means landlords could end up paying a much larger rate of tax to the government than is currently the case. Top-rate taxpayers are expected to be particularly hard-hit by the changes.

By switching to a limited company arrangement, many of the costs associated with having a buy-to-let property can be put down as allowable expenses. Corporation tax, payable by limited companies, is also set to be reduced in the near future.

Of course, any landlord considering going down this route should take professional legal and financial advice before doing so. Setting up a limited company puts certain requirements on the landlord to fulfil. Furthermore, certain costs are involved in selling a property back to yourself by switching from an independent landlord to a limited company.

The most notable cost is the potential for capital gains tax to be triggered. If a property has risen in value since it was first purchased by the landlord, they will have to pay capital gains tax on it. This would amount to 18% or 28%, depending on whether the landlord pays tax at the basic rate or the higher rate.

One thing is certain – no two landlords will be in the same situation, thus making professional advice a necessity before doing anything at all.

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