Many people have looked at buy-to-let.
It’s an investment that’s easy to understand. You buy a property and let it out and look forward to capital growth and rental income each month. Even if you need a mortgage, it might produce a steady surplus.
There seem to be none of the risks of stocks and shares, and there is little specialist knowledge required to be a landlord.
In fact, it became too popular, distorting the housing market, and making it even harder for first-time buyers to afford or even find and that first home. The government cracked down with increased tax, rules and regulations. Many investors fled the sector, selling up in droves.
But there are still people who are enjoying a steady income and long-term gains through renting out property.
What are their secrets?
The challenges landlords face
The love affair the UK has with bricks and mortar has led many to use buy-to-let to build wealth or fund their retirement. Buy-to-let properties with returns of around 7% may be possible and are not uncommon. That means an £200,000 buy-to-let property bringing a return of around £14,000 rental income each year before tax and other costs. This is a great deal better than returns from savings accounts, and arguably more reliable than stocks and shares investment in a turbulent economy.
What’s more, unlike most other forms of investment, landlords can earn potential returns on borrowed money, with a buy to let mortgage
But there are growing challenges.
Higher taxes and increased regulation have hit the sector from some years now. Mortgage relief has been slashed, driving up the cost of a buy-to-let deal.
In October, the Government added a 2% stamp duty surcharge on top of the extra 3% landlords already pay, adding thousands of pounds to the cost of buy-to-let and second home purchases. A landlord buying a £200,000 property would pay £10,000 in stamp duty as an upfront cost.
Then there’s income tax. A higher rate taxpayer will be handing 40% of the rent they charge to the taxman.
With maintenance and other costs to cover, many small landlords struggle to see any profit, and those with a large mortgage may be making a loss.
But despite the downsides and the costs, there may still be profits to be made.
Using a company to cut tax bills
The key to property profits seems to be to operate as a business.
Owning property in a limited company, instead of in your own name – a process also known as ‘incorporating’ – can help landlords improve their buy-to-let returns.
Owning within a limited company comes with various tax advantages, including the fact that at 25%, corporation tax is lower than the income tax.
A limited company also allows property investors to offset all of their mortgage interest against rental income before paying tax.
Individual landlords who pay higher rate tax are effectively taxed at 40% on turnover, company landlords are taxed at 25% purely on profit.
Take the example of higher-rate taxpayer who rents out a house held in their own name. If they have mortgage interest payments of £500 a month on a property rented out for £1,000 a month, they pay tax on the full £1,000, with a 20% rate on the £500 used towards the mortgage. He or she will be left with just £200 a month.
The landlord who uses a limited company would come away with £375.
Lower-rate taxpayers, particularly if they own property outright, might be better off as private landlords. Most other people are likely to be better off running a buy to let company.
Could you run a buy-to-let business?
Running a business may be more demanding than simply collecting the rent as a private landlord. Company accounts must be formally prepared and filed, records maintained, and directors appointed. You may need an accountant.
But the extra hassle might be more than worthwhile.
So, is a buy-to-let business a good idea for you? To discuss the practicalities of setting up a company, and just as important finding the most suitable buy-to-let mortgage for your plans, talk to us at Continuum.
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Will putting a buy-to-let in a limited company reduce a landlord’s tax bill? | This is Money
Buy-to-let rents bringing in 7% returns to landlords
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to a particular mortgage product and you should seek independent financial advice before embarking on any course of action.
Your home or property may be repossessed if you do not keep up repayments on your mortgage.
The Financial Conduct Authority does not regulate some aspects of Buy to Let mortgages or taxation advice.
The value of property investments and income from them can go down as well as up and investors may not get back the amount originally invested.
