In 2017, the UK government announced plans to gradually reduce the amount of tax relief investors could deduct against mortgage interest for buy-to-let properties. This phasing out was concluded in April 2020, and as of 2021, investors can no longer claim any tax relief on their buy-to-let mortgages. The rules apply to individual property owners rather than businesses that own property through corporate structures.
The introduction of the tax credit hasn’t dramatically changed the situation for basic rate taxpayers. While the calculation is different than under the old regime, there is little other variation in terms of the end financial outcome. If you are in the higher tax bracket, the situation is vastly different. The changes mean you will not be able to offset all your mortgage interest, and, as a consequence, you will pay a significantly higher tax on your net rental income. Increasingly, this is changing how investors are structuring their property ownership, increasingly considering corporate structures (usually SPVs and limited companies) over private ownership.
In the past, many individuals would own buy-to-let properties in their own name, potentially working with management or leasing companies to support them with day-to-day operations as required. However, with the end of the rules that allowed individuals to fully deduct mortgage interest from rental income, many investors are assessing how they hold property, especially if you have two or more rental properties. While individuals (or couples) can’t deduct mortgage income any longer, the rules are different for companies, and mortgage interest will still be classified as a cost when looking at company expenses and profitability.
Unfortunately, it’s not as simple as just setting up a company or special purpose vehicle to hold your property. While owning property through a company will give you a tax break, additional charges are associated with running a company, such as accountants, corporation tax, etc. As a result, corporate structures tend to be more beneficial if you have a more significant buy-to-let investment portfolio. Thinking carefully about what ownership structure makes the most sense for you is essential.
Enness’ team is always happy to talk you through your options and explain the benefits and drawbacks of buying through a corporate structure or personally owning buy-to-let property. It can be complex to understand – especially if you are buying your first buy-to-let property or are just starting out as a career landlord. If you have questions, if there’s anything you’d like to understand or want to know what your potential options are, reach out to a member of the team, who will be delighted to chat with you about your options.