Is buy-to-let still worth the bother?

Going into buy-to-let investing has become a far less appealing prospect than it once was. From April this year, buyers of second homes (whether for buy-to-let purposes or not) will be hit with a 3% increase in stamp duty. Tax relief on mortgage interest is also being phased out gradually – soon buy-to-let landlords will no longer be able to deduct the cost of interest as a business expense and will instead receive a tax credit equivalent to 20% of interest cost.

These changes bite into potential returns at a time when many properties are hardly trading at bargain levels and so should make current and potential landlords reconsider whether or not it’s worth the hassle.

However, those who are committed to the idea of buy-to-let might wonder whether one way to mitigate costs is to incorporate as a company. Landlords structured as companies are exempt from the above interest payment measures (but not from the new stamp duty), instead paying corporation tax on their profits. This will drop to 19% in April 2017 and 18% by 2020. Sounds good. “But [incorporation] is a far from simple process,” emphasises Olivia Rudgard in The Daily Telegraph.

Practically speaking, the majority of landlordswould need to set up something called a special purpose vehicle through which to buy the property. Once incorporated, you take on a different set of responsibilities to a standard buy-to-let landlord. Rather than just filling out a self-assessment tax return, you will have to submit annual returns and accounts. For most people, this means factoring in accountants’ fees.

Also, if you’re already a buy-to-let owner and you want to incorporate, you will be hit for capital gains tax (CGT) on your current property (if it’s gone up in value), plus another round of stamp duty, as you’d have to sell the property and buy it again inside the company. You might be able to avoid the CGT if you can prove the property is a “business” rather than an “investment”, writes Rudgard, though this isn’t always easy to show.

Another potential issue is the annual tax on enveloped dwellings, which Merryn Somerset Webb has highlighted before on her MoneyWeek blog. This is a tax on properties valued above a certain amount that are held inside companies, which from 2016 will be charged at £3,500on houses worth more than £500,000.

Also, note that if you want to take profits from your company as a dividend, amounts above £5,000 will be taxed at a higher rate from April. Finally, and perhaps most importantly, remember that while George Osborne has already made buy-to-let vastly less attractive than it once was, he may not be done with landlords yet.