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Is a Company the best way forward for Buy to Lets?

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The Summer Budget made this decision even more complicated!

First landlords have a lot to consider..

  1. Transferring their portfolio will probably incur Stamp Duty and Capital Gains
  2. Mortgages can be harder to find and more expensive for companies
  3. Share ownership options and objectives
  4. Company Admin, Accounts and Tax
  5. Capital Gains Allowances, ATED and IHT

But one key advantage is explained by Adrian Benosiglio, real estate tax partner at Baker Tilly (www.yourmoney.com)

For example, Mr Jones (a 45% taxpayer) has a house with net rental income of £100,000 and mortgage interest of £90,000. Currently he would pay £4,500 income tax on profits of £10,000.

From April 2020, he’ll pay £27,000* income tax. This is calculated by applying his marginal rate of tax to his rental income (£100,000 x 45%) which gives a tax liability of £45,000 and offsetting this with tax relief claimed on the mortgage interest at the lower amount of 20% (90,000 x 20%) which would give tax relief of £18,000. This would leave Mr Jones with a tax bill of £27,000 (£45,000 less £18,000). The end result would be an overall annual loss after tax of £17,000, with insufficient cash flow to make repayments on his loan.

A company is not affected by these measures and therefore would receive full mortgage interest relief. Additionally, corporation tax is charged at 20% and is due to fall to 18% in 2020. Using the above example, a company would pay £2,000 currently and £1,800 from 2020; leaving sufficient funds to make repayments.

Complicated isn’t it!

steve@bicknells.net


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