As we step into a new tax year this April, landlords across the UK are bracing for a significant hit to their earnings. The capital gains tax (CGT) allowance, a critical figure for anyone selling buy-to-let properties or other investments, is undergoing yet another reduction. Only last year, landlords could enjoy a CGT allowance of £12,300, allowing them to make that amount in profit without paying tax on it. However, this figure was cut to £6,000 in April 2023 and is set to plunge further to £3,000 for the 2024-25 tax year.

This move comes on the heels of the 2020 withdrawal of mortgage interest tax relief, a change that has already made it tougher for many to see profitable returns from buy-to-let investments.

The Impact on the Market

The squeeze hasn’t gone unnoticed. A significant number of landlords have chosen to exit the market, evidenced by a 56% increase in residential property sales subject to CGT between the 2021-22 and 2022-23 tax years. According to Christopher Springett, a tax expert at Evelyn Partners, this surge is a direct response to the compounded challenges of tax adjustments and soaring interest rates. Some landlords are hastening to sell off properties in anticipation of further tax amendments.

The Limited Company Route

Despite these challenges, there’s a strategy landlords can consider to potentially mitigate their tax burdens: incorporating their buy-to-let business. Operating as a limited company can offer various tax efficiencies, though it’s not a one-size-fits-all solution.

Benefits of Buying Through a Limited Company

• Tax Efficiency on Rental Income: Landlords paying higher-rate income tax can save significantly. For instance, a higher-rate taxpayer earning £17,000 in rental income and paying £10,000 in mortgage interest would see a drastic reduction in their tax bill if the property is owned by a limited company, thanks to the ability to deduct the full mortgage interest before taxes.
• Corporation Tax Advantages: With corporation tax rates lower than personal income tax rates for profits under £50,000, the appeal is clear. Plus, dividends drawn from the company can attract lower tax rates compared to personal income, even with the upcoming dividend allowance cut.
• Strategic Financial Planning: Limited company landlords have the flexibility to manage when and how they withdraw profits, potentially aligning withdrawals with lower-income years to minimise tax liabilities.

A Growing Trend and Mortgage Market Response

The shift towards limited company structures has not only become more popular among landlords but has also led to an increase in mortgage products tailored to these entities. Major lenders and brokers report a significant portion of their business now caters to limited companies, with competitive rates and products increasingly available.

Considerations Before Making the Switch

Transitioning to a limited company isn’t without its hurdles. Costs associated with transferring properties into a company, such as stamp duty and CGT, can be steep. There’s also the matter of increased administrative responsibilities and potential professional fees for managing corporate filings and taxes.

Conclusion

The situation for buy-to-let landlords is undoubtedly shifting, with tax changes and market dynamics posing new challenges. However, by considering alternative structures like limited companies, landlords may find pathways to not only navigate these changes but potentially emerge in a stronger financial position. As always, seeking personalised tax advice is crucial before making such transitions.