Should I incorporate?

Accountants across the country who prepared self-assessment tax returns have been met by shocked Landlords who were struggling to process how large their tax bills had grown in the last two years.

The shocks are set to continue for this tax year and next year the 100% tax-relief landlords once enjoyed continues to be cut to 0% (in 2020/21). This will be replaced by a mere 20% basic-rate tax deduction from the income tax liability. 

HMRC may take a bigger share of the profit as taxes

A specialist accountant dealing with Landlords mentioned how in one of the worked examples – HMRC will take a greater share of the profit than the Landlord themselves. Some profit-making Landlords could end up making losses.

A leading landlord association says Landlords will lose up to £400 million annually. Most Landlords are paying significantly more tax than before the changes. Landlords will pay more tax than other moderate earners with other income sources. The falling profits will cause many Landlords to sell an estimated 46,000 properties. 

The Alternatives

Many Landlords are moving towards Limited Company options. Special Purpose Vehicle buy-to-let (BTL) options which have not been affected by these new regulations.

These Limited Company (SPV) BTLs can be incredibly profitable as they benefit from corporation tax and Capital Gains Tax (CGT) benefits, which private Landlords do not enjoy. The Government might relax the rules set on private BTLs, but smart Landlords will invest where opportunity exists for them. Leading banks have now entered this space and the interest rate has dropped for this type of mortgage. A leading survey (Q3 in 2019) indicates over 60% of landlords will now buy property using this route.

Another solution is for Landlords to restructure the equity of the property (subject to rules) or buy the property in the spouse’s name if they are a low-income earner. This simple and effective solution will work for those having a smaller number of properties or joint properties. The timing of this restructuring is quite critical, and it is best to speak to your mortgage or financial advisor to benefit from this.

Nonfinancial costs are an allowable expense and claimable at 100%. Why not decorate your house? Plus, better-maintained houses attract more rent.

Finally, some clients have the option of investing in different types of property which have significantly more concessions that could yield better profitability. 

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