Before 2016, most investors bought investments properties in their personal names with a selected few holding their properties investments as a limited company.
As a result of changes of announced in 2016, the government introduced new regulation impacting the treatment of mortgage interest being phased in over a 3-year period from 2017. This means that from 2020/21, property investors will no longer be able to deduct mortgage interest from their rental income when determining their income tax liability. Furthermore, the tax deduction will be limited to the basic rate; meaning you can claim a tax relief at 20% on the mortgage interest payments.
Following up from these changes, a basic rate taxpayer could get pulled into a higher rate tax bracket because mortgage interest payments are no longer deducted from rental income therefore leading tax being charged on higher gross profit.
Investing in a limited company has its advantages among which:
Rental income profits after costs are treated as corporate profits, hence they will be taxed at the corporation tax rate currently 19% but reducing to 17% in 2020. When compared to basic taxpayer rate of 20% and higher taxpayers of 40%; there is a small benefit for basic rate tax payers but an over 50% saving for a higher rate and additional rate taxpayers.
Mortgage interest payments are treated differently when investing in a limited company. They are considered as part of the cost of running the business and as a result, they are deductible against gross rental profits.
Before deciding to invest in a limited company, there are some other factors to consider:
SPV mortgages may be more difficult to secure
Dividend income is taxed with your other income, so you could end up paying more tax than you would have if you had invested in a personal name.
Set up and running costs of a limited company are not to be neglected.