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Comment: Limiting the BTL tax damage

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The benefits are substantial for landlords who operate as a limited company, although this won’t be suitable for everyone

Landlords scrambled to buy property before former chancellor George Osborne’s costly new stamp duty charges on buy-to-lets came into force in April. Since then, the market has slowed considerably. However, little by little, landlords are returning to the scene in a brand-new guise.

To avoid the income tax charges now imposed on individuals renting out an investment property, many have chosen to become registered as a limited company. In fact, 63 per cent of buy-to-let mortgages are being purchased through limited companies today compared to just 21 per cent before the charges were announced.

The stamp duty update means landlords face a 3 per cent surcharge on purchases, and the announcement that mortgage interest relief will be tapered back to 20 per cent starting from next year adds more doom to the gloom.

But while individuals will no longer be able to offset their mortgage interest against their rental income, limited companies are exempt from the changing personal tax liabilities.

The benefits of operating as a limited company are substantial: high tax relief, tax-free dividends for individuals up to £5,000, no income tax on retained profits (ideal for portfolio growth) and director’s loans that can be used for personal funds.

That said, operating such a system requires more intensive admin and limited companies can be affected by higher mortgage rates, so buying a property this way is not necessarily the right thing for all.

However, with the right guidance from an accountant and the right advice in relation to the finance arrangements, there will be big benefits for many.

Carl Shave is director of Just Mortgage Brokers

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