Section 24 means that private landlords can no longer offset mortgage payments
In April 2020, the Government made changes to individual landlord's tax relief. Buy-to-let landlords now have to pay income tax on the entire rental income, irrespective of mortgage interest costs. Landlords instead recieve a 20% tax credit, meaning private landlords with a mortgage can no longer offset mortgage interest costs in full against income tax bills on rent.
As a result, landlords now pay tax on rental income based on revenue rather than their profit after mortgage interest is paid. For those of you thinking of setting up a limited company, you’ll be glad to know that mortgage interest is treated as a business expense. That means if your property is owned by a limited company, you can minus the cost before paying corporation tax. If this is something you are considering, it's always smart to obtain financial advice from a registered tax expert.
What are the implications of the Capital Gains Tax changes?
There have been recent tweaks to Capital Gains Tax. This means that buy-to-let investors also face a heftier tax bill on profits when they sell up. The Capital Gains Tax rate on residential property is 28% for higher rate taxpayers and 18% for basic rate taxpayers versus 18% and 10% on other assets. It’s worth noting that as part of the recent Autumn Statement, Chancellor Jeremy Hunt confirmed that the tax-free allowance for capital gains tax will be reduced from the current rate of £12,300 to £6,000 in April 2023. It will then be reduced further the following year from £6,000 to £3,000. This lower tax-free allowance means landlords will have to pay more capital gains tax when they sell a property in the coming years.
Should you set up a limited company?
One of the big questions you might want to ask yourself, if you’re thinking of becoming a landlord in 2023, is whether or not to purchase your buy-to-let through a limited company. If you’re in the higher tax bracket, you could be paying 40% tax on your income if your property is set up in your personal name. For this reason, Ranjan Bhattacharya – an investor and property mogul with over 35 years experience in the industry – is convinced that landlords should look to set up a limited company. This means you’ll pay the lower corporation tax – which currently sits at 19%. This is likely to rise to 25% in 2023 which will affect your profits again.
England, Northern Ireland & Wales Income Tax Rates
|
Tax Band
|
Income
|
Tax Rate
|
|
Basic Rate
|
£12,570 to £50,270
|
20%
|
|
Higher Rate
|
£50,271 to £150,000
|
40%
|
|
Additional Rate
|
over £150,000
|
45%
|
Scotland
Scotlands income tax rates slightly differ from the areas mentioned above and can be identified in the table below.
|
Tax Band
|
Income
|
Tax Rate
|
|
Standard Rate
|
£12,570 to £14,667
|
19%
|
|
Basic Rate
|
£14,667 to £25,296
|
20%
|
|
Intermediate Rate
|
£25,296 to £43,662
|
21%
|
|
Highest Rate
|
£43,662 to £150,000
|
45%
|
It's worth mentioning that the number of buy-to-let mortgages on offer for limited companies tends to be lower than for private individuals. You may find it more difficult to arrange a mortgage, and you'll also have to file annual accounts – which is done by an accountant – and this can also be pretty costly.
Are there inheritance tax benefits of a limited company?
Landlords planning to pass their property portfolio down to children or family members could avoid large amounts of inheritance tax by buying the property through a limited company. You’ll need to speak to an expert for individual personalised advice on this.
How hands on do you want to be?
There’s no doubt that buy-to-let investments require a little time and effort. You’ll need to research and buy the property and then manage the investment from then on.
You need to be willing to go through the buying process, do any improvement work, furnish the property, and then decide whether or not to instruct a letting agent to then manage it for you…
What are the benefits of using a letting agent to manage your property?
Regulations are a huge factor to consider. You need to keep safe and legal and one of the best ways to ensure this is by using an expert letting agent. For example, landlords currently need an Energy Performance Certificate (EPC) with a minimum rating of E. You also need to conduct electrical safety checks every 5 years and gas safety checks each year. Sometimes having an agent there to handle these intricacies can be really beneficial. It gives you peace of mind, reduces your workload and frees up your time.
So, is buy-to-let worth it in 2024?
No investment is without risk but if you take a long-term view of it, buy-to-let can work for you. It’s not a get rich quick scheme but there is a good income to be made if you go in with your eyes open. Although some of the recent changes make buy-to-let less attractive to some investors, if done right, it still remains profitable. Whilst rental yields have declined, it's important to remember that although rental income is important, capital growth is also a factor that makes investing in property very lucrative.
What’s next?
One of the first things you need to ensure is that you’re getting the right price for your rental property. Your best bet is booking a valuation with one of our lettings experts who can give you an idea of rental income, answer any questions that you may have and also give you an idea of how you can increase your yield.
Alternatively, grab a quick 60-second valuation now. You can do this on a property you currently own or on a property you’re thinking of turning into a buy-to-let. It will give you a good idea of what you could be earning in rental income.
