It is a question that should be on the lips of all buy-to-let landlords, but it is not. It is a question that could free up more capital for expansion and make buy-to-let businesses much more lucrative over their lifetime. One that could reduce costs substantially.
The question is not whether to switch mortgage provider, invest in Eastern European holiday homes, or convert to interest only mortgages. The question is, ‘should I set up a limited company to channel my buy-to-let business interests?’.
An unanswered question
As far as maximising income through property investment goes, there can be fewer more important questions. However, the answer to this long-standing question is rarely sought by those with buy-to-let assets.
They would rather not go to the trouble and expense of paying for advice from an accountant expert in tax affairs. They may have built their portfolio up from one property to 20 over the years and be expert at ensuring they switch to the most competitive buy-to-let mortgages, but could nevertheless be burdened by a business structure that has long outlived its usefulness.
They could benefit massively from placing their buy-to-lets within a limited company, rather than allowing them to continue to fall within their personal tax declaration. They do not because they, like most of us, are creatures of habit and are happy to continue as they have been.
So they end up inadvertently restricting the potential development of their business.
I do not have the editorial space available here to explore fully the advantages of a limited company. It goes without saying the extent of such advantages will vary from individual to individual and are best explored by a tax expert.
However, broadly speaking, the key advantage is that it gives a landlord more flexibility with respect to tax affairs.
The landlord will pay tax on their rental earnings at the corporation tax rate rather than at the income tax rate. This is potentially a great advantage to those used to paying income tax at the 40 per cent higher rate, given that corporation tax is levied at 19 per cent. Having rental income subject to corporation tax in this way allows landlords to maximise the money kept within their businesses.
Additionally, a limited structure is more effective over the longer-term where individuals may want to plan for the disposal of property assets, ensure they have adequate income for their retirement and minimise inheritance costs.
A safer option?
Aside from such monetary advantages, it is invariably safer to have properties within a company and kept separate from personal assets. It also helps should a landlord decide to pass assets on to his or her heirs.
The case for having a limited structure will have been pretty strong for a large number of landlords for some considerable time, but few will have taken the necessary next step and investigated it further.
It is for this reason that CHL Mortgages has decided to link up with an association of accountants, The Association of British Independent Accounting Firms, which represents a national network of accountants, to offer landlords a free two-hour consultation.
The two-hour meeting will be held with a certified or chartered accountant expert at structuring businesses tax-efficiently and will determine what precise structure best suits the landlord’s needs and get them to identify medium and longer-term goals.
Key questions addressed during the consultation will include whether the landlord is:
- Paying too much tax on property income.
- Making maximum use of tax-deductible expenses.
- Arranging the business to maximise retirement income from property.
- Considering the inheritance tax (IHT) implications presented by buy-to-lets.
- Looking to minimise capital gains tax if the landlord plans to sell their property.
If incorporation is not found to be the best way to proceed, advice will be given on a range of alternative structures, at no charge.
We believe this initiative – available only via financial intermediaries authorised to sell products marketed by CHL Mortgages – is a first in the mortgage industry and one that will enable our intermediary partners to assist their buy-to-let clients choose precisely the right business structure that matches their individual needs and circumstances.
It will hopefully mean more landlords answering what remains the most pressing question for any buy-to-let investor.
