When considering a buy-to-let property investment, a crucial decision is whether to purchase it in your own name or through a limited company. This decision hinges largely on tax implications, especially after changes to mortgage interest relief since April 2020. Below, we explore both options and the impact on your financial strategy.
The Tax Relief Effect
Since 2020, mortgage interest relief has been capped at the basic rate of 20%, even for higher or additional rate taxpayers. This means that even if you’re taxed at 40% or 45%, you can only claim relief on mortgage interest at the 20% rate. For some, this could reduce profits or even result in a net loss after taxes.
Buying a Property in Your Own Name
If you buy a buy-to-let property in your own name, your tax situation will depend on your tax bracket.
- Basic Rate Taxpayer: If your rental income doesn’t push you into a higher tax bracket, the 20% mortgage interest relief won’t significantly impact you.
- Higher or Additional Rate Taxpayer: For higher or additional rate taxpayers, the restricted mortgage interest relief can lead to a higher tax bill. This could result in reduced profits or even a loss, as the relief only applies at the 20% rate.
If you’re in this higher tax bracket, it might be worth considering other investment strategies or seeking business loans to offset these additional costs.
Buying a Property Through a Limited Company (SPV)
Purchasing property through a limited company, often a Special Purpose Vehicle (SPV), is a popular choice for higher-rate taxpayers due to its tax advantages.
- Tax Efficiency: Using a limited company allows you to deduct mortgage interest at the full corporate tax rate, which is currently 19% and set to rise to 25%. This can be a more tax-efficient approach for higher-income earners.
- Asset Finance Considerations: Limited companies can use asset finance to fund property investments, freeing up capital for other projects. However, the costs of setting up and managing the company must be considered. You’ll need to adhere to the Companies Act 2006, with additional administration, legal obligations, and professional fees.
- Mortgage Rates and Fees: Mortgages through a limited company can have higher interest rates and fees than personal buy-to-let mortgages. It’s important to factor these costs into your calculations to determine whether the tax savings outweigh the extra expense.
Using Financial Advisors and Brokers for Property Investment Decisions
When deciding between buying in your name or setting up a limited company, consulting a financial advisor can be invaluable. They can help you assess your overall finance strategy, guiding you on tax implications and the best way to structure your investment. A stockbroker can also advise on other forms of investment, like stocks or bonds, which could complement your buy-to-let portfolio.
Additionally, working with a brokerage firm can help you secure competitive financing options, and a financial advisor can assist you in structuring your investments to align with your long-term financial goals.
Importance of Finance Strategy and Benchmarking
A strong finance strategy is essential when navigating buy-to-let investments. It involves setting clear goals, whether it’s maximizing rental income, reducing costs, or minimizing tax liabilities. Regular finance benchmarking—comparing your property’s performance against industry standards—can help you assess whether your investment is performing as expected, and if adjustments are needed.
By optimizing your profitability, you can maximize returns on your property investments, even in the face of tax restrictions. Finance business partnering with professionals can provide insights into your property’s financial health and guide you in making informed decisions.
Conclusion
Whether you buy a buy-to-let property in your own name or through a limited company depends on various factors, including your income level and tax situation. For higher-rate taxpayers, a limited company can offer significant tax advantages, but it also comes with additional responsibilities. By developing a solid finance strategy, utilizing asset finance, and consulting with accountancy professionals, you can navigate these complexities effectively. Make sure to also consider other investment options and consult financial advisors to ensure your buy-to-let decision aligns with your long-term goals.
To explore investment opportunities, connect with one of our trusted financial advisors today.