Meet Kevin and Janet: Two Landlords, Two Very Different Tax Bills

Let’s talk about two private landlords we know – Kevin and Janet. Both own five properties, generating an annual rental income of around £100,000. Last year, they received tax bills that made them sit up and take notice.

Kevin, a traditional buy-to-let landlord, was hit hard by the Section 24 tax changes, seeing his tax bill jump by over £8,000. On the other hand, Janet, who’d recently incorporated her rental properties into a limited company, only saw an increase of around £1,500.

What made the difference? Let’s dive into the world of limited companies to understand how they can help UK landlords like Kevin and Janet slash their property tax bills.

Understanding Limited Company Structures for Buy-to-Let Landlords

A limited company is a separate legal entity from its owners, offering several benefits when it comes to managing rental properties. When you incorporate your properties, they become assets of the company rather than personal ones. This separation can help reduce your tax liability significantly.

Mortgage Interest Relief and Section 24 Tax Changes

Before April 2017, landlords like Kevin could claim mortgage interest as a cost against their rental income, reducing their taxable profit. However, due to the Section 24 tax changes, this relief is being phased out by 2020.

Limited companies are not subject to these changes, allowing landlords to continue claiming mortgage interest relief and potentially lowering their tax bills significantly.

How Incorporation Works for UK Buy-to-Let Landlords

Incorporating your rental properties involves setting up a limited company, transferring ownership of the properties to this new entity, and managing them through the company. This process requires assistance from legal professionals and accountants but can result in substantial tax savings.

Pros and Cons of Incorporating Your Rental Properties

While incorporation offers significant tax benefits, it also comes with some considerations:

Pros:

  • Potential for reduced tax liability due to mortgage interest relief and other corporate tax benefits
  • Limited liability, protecting your personal assets from rental property debts

Cons:

  • Setting up costs (e.g., legal and accountancy fees)
  • Possible increased complexity in managing the properties through a company
  • Stamp Duty Land Tax (SDLT) surcharge of 3% on buy-to-let properties purchased by companies

Simplifying Your Tax Reporting with Landlord Pro

Whether you’re a traditional landlord like Kevin or a limited company landlord like Janet, Landlord Pro can help. Our compliance app helps track your rental income, expenses, and compliance in one place, making tax reporting cleaner regardless of your property structure.

Frequently Asked Questions

Can I still claim mortgage interest relief if I incorporate my properties?

A: Yes, limited companies can claim mortgage interest relief, which is not available to individual landlords due to the Section 24 tax changes.

How much does it cost to set up a limited company for buy-to-let purposes?

A: The costs of setting up a limited company vary depending on factors such as legal and accountancy fees, but they can typically range from £1,000 to £2,000.

Will I be subject to the 3% SDLT surcharge if I buy a property through my limited company?

A: Yes, buy-to-let properties purchased by companies are subject to a 3% SDLT surcharge in addition to the standard rates.