‘Buy-to-let was my retirement plan
- now I’m being pressured to promote up’: Hard-pressed landlords concern the newest Budget tax raid would be the last straw… however consultants say there’s a strategy to increase your income

For years, investing in buy-to-let properties has been a strategy used by millions to generate an income to live on in retirement.

But many landlords fear the latest tax raid announced by Chancellor John Healey last week was the final straw and plan to sell up.

They have been hammered by a triple attack on profits in recent years, as they face a cocktail of high mortgage rates, suffocating regulations and tax hikes.

In the Budget on Wednesday, Healey announced buy-to-let investors would face a double tax hike next spring. Rachel Reeves announced a two percentage point increase last year, but now, households will pay an extra 4p in the pound on rental income from April.

Industry experts and even the Government’s official forecaster warned the move will force out both professional landlords and those who had banked on it to get them through older age. The Office for Budget Responsibility warned this measure – alongside the host of other punitive policies against landlords announced in the past decade – risks triggering a ‘steady rise in rents’.

Readers tell us their profits have been whittled down over the years, pushing them to reconsider their plans.

But there are many tricks investors can use to weather the storm and shore up their profits.

One of the most valuable tactics is to buy properties through a so-called limited company.

Jason Harris-Cohen, a portfolio landlord who runs Open Property Group, says he expects the shift to limited-company ownership to accelerate now.

It won’t make financial sense for everyone, but here’s how to see if the numbers stack up for you.

How does it work?

Buy-to-let investors can hold a property in one of two main ways – either in their own name or via a limited company.

Those who choose to buy properties through a limited company don’t personally own the home in the eyes of the taxman. Instead, the company does and landlords own shares in that company.

From April, basic-rate taxpayers holding homes in their own names will pay 24 per cent tax on rental income, up from 20 per cent today.

Higher-rate taxpayers will face a 44 per cent rate, up from 40 per cent, while additional-rate payers will be hit with a 49 per cent rate, up from 45 per cent.

But for properties owned in a company, corporation tax is charged instead at 19 per cent for profits up to £50,000 and 25 per cent for profits over £250,000.

It seems like a no-brainer, but there are some quirks you should be aware of before jumping in.

You’ll still have to pay either personal income tax or dividend tax when you withdraw your profits from the company.

If you take income as a dividend, you’ll be charged dividend tax, minus the £500 tax-free allowance.

For basic-rate taxpayers, that is charged at a rate of 10.75 per cent, 35.75 per cent for higher-rate and 39.35 per cent for additional-rate.

Who is it right for?

Holding properties in a limited company is generally preferable, says Elliot Castle of We Buy Any Home, especially if you’re a higher rate taxpayer or have a large amount of mortgage borrowing.

That’s because limited companies can deduct all of the mortgage interest paid against their income before calculating tax.

Personal owners only get relief at 24 per cent, from April.

Take a property that brings in £25,000 of rental income a year, with £1,000 of allowable expenses, such as property repairs and £8,000 paid in interest on a mortgage.

A personal owner who rents the property out will have £7,360 left over from the rent after expenses, interest and tax from April.

This assumes the personal allowance (the £12,570 you can earn before paying any tax) has been used up by other income and the landlord is a higher-rate taxpayer.

But a limited company would be left with £12,960 as it benefits from full mortgage interest relief.

If taken that same year as a dividend, then you would take home £8,506, meaning you would still be £1,146 better off doing so via a company – albeit narrowly.

This assumes you have the £500 tax dividend allowance and corporation tax is 19 per cent.

Those looking to build or expand their portfolios might find the company structure works well, says Mark Levitt, partner at accountants Blick Rothenberg. You can keep the money inside the company to reinvest in or refurbish other properties – without withdrawing it first and paying tax on it.

‘You have got more retention of your money,’ he says.

Harris-Cohen adds: ‘They tend to work best for higher-rate and additional-rate taxpayers with mortgaged properties, particularly landlords building a portfolio who want to retain rental profits.’

Mortgage rates on properties held in a limited company tend to be higher than a standard buy-to-let rate, warns David Hollingworth of L&C Mortgages.

Rates are typically around 0.5 percentage points higher, although you might be able to borrow more money via a limited company.

The company doesn’t pay capital gains tax but instead profits are stung with corporation tax.

Who should avoid it?

Personal ownership typically wins out over a limited company for landlords with only one or two properties, according to Castle.

One of the key advantages of a limited company is the ability to take off mortgage interest when calculating tax, and landlords without mortgages wouldn’t benefit.

If you need to live off the rental income, having a limited company may not suit you. You’d need to take profits every year as a dividend so wouldn’t benefit from reinvesting them before paying personal or dividend tax.

The company will need to pay a 5 per cent stamp duty surcharge when it buys a property.

How can I do it?

Setting up a limited company is relatively straightforward, says Levitt. Opt for what is called a special purchase vehicle (SPV) limited company. Choose a name and check it doesn’t already exist on the Companies House website.

Then register the company via the Government website. You’ll typically need to input your personal details, office address and details of shareholders.

You’ll also need to choose an SIC code to attach to your company, which indicates what type of business you own. But make sure you choose the right one. A typical one is 68209 – ‘other letting and operating of own or leased real estate’.

And you’ll need a ‘memorandum of association’ signed by the shareholders, as well as an ‘article association’. You can use an accountant to do this or do it yourself. It costs £100 and companies are usually registered within 24 hours.

You’ll need to set up a company bank account and register for corporation tax within three months of starting to do business.

You can do this through your Government Gateway account.

What else can I do?

If you don’t set up a limited company, make sure you claim reliefs you are entitled to. When you’re filing a tax return you can deduct expenses from your rental income. Allowable expenses include property maintenance and repairs insurance, ground rents or service charges or letting agent fees.

You can also claim property allowance, which is up to £1,000 tax-free income each tax year.

But if you claim for one of these, you cannot claim for the other.

Also, if you rent out a furnished room in your own home, you can earn up to £7,500 a year tax-free under the Rent a Room Scheme.

Pounce on good mortgage rates when they pop up. The average five-year buy-to-let residential rate was 6.05 per cent on Friday, according to MoneyfactsCompare.

But you can get one from NatWest for 5.08 per cent, with a 40 per cent deposit and £995 fee.

‘It’s just too much hassle to continue’

Heather Moriarty-Phillips used to think property was the best investment you could make.

The retired solicitor, who is in her 70s, spent decades building up a large portfolio of buy-to-let properties in the hope of being able to live off the rental income in retirement. Her aim was to then pass on the properties to her two children.

But her plans have been destroyed by successive governments tightening the rules and making tax raids.

She says the Renters’ Rights Act introduced in May has been the ‘icing on the cake’ that shows buy-to-let is no longer worth it.

Heather, who is a widow, has sold 75 per cent of her properties in the past decade as she has lost faith in the investment.

She says: ‘I always believed property was more valuable than pensions for retirement, but now I feel differently.’

She had 12 properties around Norwich in 2016 but has reduced it to three over the past decade, mainly due to extra administration, including mortgage interest relief restrictions, minimum energy performance requirements and higher income taxes.

Heather estimates she is several thousand pounds worse off over the past decade due to reduced rental income after selling the properties and the extra costs of upgrades and repairs.

Heather describes last week’s tax grab as ‘another nail in the landlord coffin’. She says: ‘I had been bracing myself for the two percentage point hike, but another one before the earlier increase has even taken effect is unbelievable.

‘It makes me determined to sell two more of the properties.’

‘There’s a never-ending list of costs’

Ed Heaton, founder of national buying agent Heaton & Partners, is among the many landlords questioning his future in the sector.

Ed, who is in his 50s, had started building his plans for his retirement around a portfolio of buy-to-lets in the south of England. He hoped to use the rent he would receive as a key source of income.

But Ed has put one of his properties on the market as he says the responsibility of being a landlord has tipped so heavily in favour of the tenant.

The portfolio has been a good investment but Ed now believes that he can earn ‘better money with less hassle’ by selling up his entire portfolio and investing in other things such as commercial property.

That way, he says, ‘you don’t get someone calling you in the middle of the night with a leaking tap or a never-ending list of costs.’