Setting up Buy to Let companies comes with costs and tax bills

08 February 2016

Since George Osborne announced that he would be reducing eligible interest relief on Buy to Let properties from 6 April 2017, some accountants have been advising their clients that they can mitigate the loss of tax relief by creating an incorporated company for buy to let purposes.

This advice concerns me. Setting up a company rather than privately owning buy to let property will come with costs.

First, there are the costs of creating the new company. If you are an existing buy to let investor who decides to transfer your properties into a corporate ownership structure, you will to need to meet legal fees, stamp duty (possibly) and administration fees. 

And once the company is set up, you’ll have the admin burden of filing annual company tax returns and sets of accounts.

But perhaps more importantly, especially if you are top rate tax payer with a six figure income, you must consider the tax implications of such a move. You might be looking at some pretty hefty future tax bills. 

If you are lucky enough to be earning over £150,000 a year, your effective tax rate could become £49.86 on every additional £100 of incremental profits earned in 2017/18. 

When you take into account your new property company will have to pay corporation tax of 19% from 1 April 2017 and that you as a shareholder will also face a tax on dividends at either a rate of 7.5%, 32.5% or 38.1% depending on their income (and based on 2017 rates),  top earners could easily see around half the firm’s profit being swallowed up in tax, and remember this includes gains arising too on future sales.  Not particularly much comfort when the property portfolio is held for capital appreciation and half the gains are lost in tax! 

On top of this, we all know that low interest rates will not last forever. So if you are thinking of financing the purchase of other properties through bank debt, you must run the numbers against the likelihood of higher costs of that debt. 

If you are consoled that the Bank of England has once again pulled back from an imminent rise in base rates, the Governor Mark Carney has it firmly on record that he wants to put up rates as soon as the economy allows. 

We are therefore advising investors considering incorporating a firm for buy for let purposes to do so with their eyes fully open, and to look at alternative options, some of which may well be much more tax efficient. 

For further information, please contact Alan Craddock or your local MHA MacIntyre Hudson tax advisor.