Duck the buy-to-let tax change

Using a limited company means higher-rate taxpayers can still get full tax relief on mortgage interest, says Emma Lunn.


New tax rules may stretch many landlords' finances too far
(Image credit: Credit: Jim Holden / Alamy Stock Photo)

Using a limited company means higher-rate taxpayers can still get full tax relief on mortgage interest.

The past year has seen an increase in the number of landlords incorporating, or setting up a private limited company, to avoid the negative impact of changes to the buy-to-let tax regime. As a result, mortgage lenders are now offering more fixed products tailored to limited-company landlords than ever before. The number of fixed limited-company mortgages stood at 235 in April 2018. This compares to 212 a year ago, 80 in April 2016 and just 17 in April 2013, according to Moneyfacts.

However, landlords should be aware that switching to limited-company status means paying higher interest rates than the rest of the buy-to-let market. The average two-year fixed buy-to-let mortgage rate, for those applying as a limited company, currently stands at 4.29%, compared with 3.01% for the rest of the market.

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Keeping the interest tax break

Changes to the rules governing buy-to-let investments explain why these higher rates may still appeal to landlords. Since April 2017, buy-to-let landlords have no longer been allowed to deduct the full cost of their mortgage interest from their rental income when they calculate the profit on which to pay tax. From April 2018 they have only been able to offset 50% of mortgage interest. The percentage will go down again next year, and from April 2020 landlords will only be able to claim tax relief at the basic rate of 20%.

As this new form of tax relief will be offered at a set rate, rather than according to the landlord's income-tax band, higher-rate and additional-rate taxpayers could end up paying far more in tax: they would have qualified for up to 45% tax relief under the previous system. The same could apply to basic-rate taxpayers if the changes push their earnings into the higher bracket.

These changes apply only to landlords who pay tax on an individual basis, rather than those operating through a company. A limited company and its finances are legally separate from your own. So if you incorporate, your profits will be taxed at the corporation-tax rate, currently 19%. Most importantly, limited companies can still deduct the full cost of mortgage interest from their rental income for tax purposes.

Take advice first

Setting up a limited company is a big decision and landlords should take both mortgage and tax advice before going ahead. New companies need to be registered with Companies House. Most landlords opt to set up a special purpose vehicle (SPV), a limited company established for the sole purpose of holding property rather than using an existing limited company that dabbles in other areas because there are more buy-to-let mortgage products available to SPVs. To register your company, you'll need to provide basic details including your company name, address, director, details of the company's shareholders and what the company does. Once the company is set up, you'll need to register for corporation tax within three months. If you already have buy-to-let properties, you'll face further tax implications when transferring property into a company. You'll need to sell your properties to your new company at the market rate, and pay stamp duty and capital gains tax. These costs will eat into the savings achieved by incorporating.

Emma Lunn

Emma Lunn is a multi-award-winning journalist who specialises in personal finance and consumer issues. With more than 18 years’ experience in personal finance, Emma has covered topics including mortgages, first-time buyers, leasehold, banking, debt, budgeting, broadband, energy, pensions and investments. Emma’s one of the most prolific freelance personal finance journalists with a back catalogue of work in newspapers such as The Guardian, The Independent, The Daily Telegraph, the Mail on Sunday and the Mirror. As a freelancer she has also completed various in-house contracts at The Guardian, The Independent, Mortgage Solutions, Orange and Moneywise. 

She also writes regularly for specialist magazines and websites such as Property Hub, Mortgage Strategy and She’s particularly proud of her work writing about the leasehold sector and a Guardian front-page story about a dodgy landlord. She has a real passion for helping people learn about money – especially when many people are struggling to get by in today’s challenging economic climate – and prides herself on simplifying complex subjects.