Income tax changes and stricter borrowing rules are leading some property investors to ask if moving a buy to let business from private ownership into a company is wise. It is all about looking at the numbers and understanding the net yield.
A proftable buy to let business relies on understanding the finances of buying and renting out a property. The gross yield is the annual rental income expressed as a proportion of property value, but ignores the day to day running costs and taxes on subsequent profits. Net yield is the annual rent plus business costs as a proportion of property value.
Here is how the tax breaks down for three different types of ownership on the assuming the landlord owns a £250,000 property with a 75% loan-to-value (LTV) mortgage:
|Company||Basic rate (20%) taxpayer||Higher rate (40%) taxpayer|
Source: Hamptons International
Net yield is the best performance measure
For higher rate taxpayers with 75% LTV mortgages against an average priced home can see their net yields plummet when mortgage tax relief changes that first came into force in April 2016 are included in the calculations.
The amount of mortgage interest higher rate taxpayers can offset against tax has fallen by half – from 40% in 2016 to 20% from 2020.
To calculate net yield, a !0% of rent cost is included to reflect repairs and expenses, like insurance.
Basic rate taxpayers see no change in their profit of £5,740 as the new mortgage interest relief rules do not affect them.
Personal or corporate ownership?
Research has shown that switching buy to lets into a company tends to favour landlords in London and the South East because they are most likely to have mortgages.
This means they gain more from incorporating and is probably why nearly half of the 229,000 buy to let companies in England and Wales are based in the capital and home counties.
Hybrid property businesses are also becoming more common. A hybrid leaves buy to lets owned personally as they are while adding new property to a portfolio with a corporate structure.
Both business strategies come with pros and cons.
Pros for incorporating
- 100% of mortgage interest is tax deductible
- Corporation Tax is due to rise from 19% to 23% in April 2023 with taper relief for companies with profits between £50,000 and £250,000
- Corporation Tax is charged against property disposals rather than Capital Gains Tax (CGT) at 18%/28%
Cons for incorporating
- Companies are more regulated than individuals and cost more to administrate ie increased accounting costs
- Stamp duty is due if transferring property into a company and CGT may be payable
- Fewer lenders will offer corporate buy to let mortgages and the rates are likely to be higher than for individual landlords
- Higher rate taxpayers may pay income tax at 32.5% on drawing dividends from a company