Considering investing in a buy-to-let to boost pension income?
Tax rules have got tighter on buy-to-let, so is it worth trying to cut your bill by owning a property through a company?
MailOnline’s property expert Myra Butterworth answers…
“There is a general view that it has become more worthwhile investing in a buy-to-let through a company, since the rules on mortgage interest tax relief were changed. This is due to a number of benefits, including paying tax at a lower rate than any level of income tax. Previously, landlords could claim full mortgage interest relief against income tax bills on rental profit, but this has been trimmed back to a tax credit based on a maximum of 20 per cent of mortgage interest payments. Under the old system, mortgage interest and other allowable expenses were deducted from rental income, with income tax calculated on the profit after these costs. This meant 40 and 45 per cent taxpayers got mortgage interest relief in full – a highly valuable aspect of investing in property. Under the new system, rental income is added to other income to decide an individual’s tax rate, with a maximum 20 per cent tax credit for mortgage interest applied.
This has eaten heavily into landlords’ rental profits, but buying a property investment via a company gives people a way to avoid this punitive measure. Within a company structure, full mortgage interest can still be claimed, with tax calculated solely on profits not overall revenue, and paid at the corporation tax rate of 19 per cent. However, there will be extra tax to pay on money taken out of the business and buying a property via a company will not suit everyone, particularly those who have a minimal amount of other assets and income. It’s important to do the maths, look at your overall financial situation, and work out whether it would work for you – as you could even be worse off”.
Andrew Wattsford, Principal Broker at Wattsford Commercial Finance adds “Please remember whenever you’re considering investing in property it’s vital that you get specialist advice from your accountant or tax adviser