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Since April 2017, tax relief for residential landlords has been changing to a new system that will be fully in place from April 2020. It means that landlords using a buy-to-let mortgage will face a higher income tax bill if they let property on a personal basis and are a higher or additional-rate taxpayer.
Previously, you could deduct finance costs, such as your mortgage interest, from your rental income to work out the profits you pay tax on, but under the new system, any tax relief will be reduced to the basic rate of 20%, even if you are a higher or additional-rate taxpayer and used to reduce your overall income tax liability. This means you could lose out by hundreds or even thousands of pounds, depending on the size of your portfolio.
By using a special purpose vehicle to purchase your buy-to-let property, it’s possible to reduce your tax liability as, at the same time, the main corporation tax rate is being cut – from 20% in the 2016/17 tax year to 17% from April 2020. Another benefit is that you may be able to borrow more than with a personal buy-to-let mortgage.
A special purpose vehicle (SPV) is a limited company set up just to hold property and carry out buy-to-let activities. If you use an SPV to buy the property, you will be treated as a business for tax and mortgage purposes rather than as an individual.
The company must not receive income from any other type of business activity (unless it’s historic) for it to be an SPV. Buy-to-let lenders will usually only lend to SPVs rather than to other types of limited companies.
It’s best to decide whether to run your buy-to-let business through an SPV or on a personal basis at the outset as switching the ownership of your property later can cost you money in both legal fees and tax – you’ll effectively have to sell the property to the SPV, so you may have to pay stamp duty and capital gains tax.
Whether you’re embarking on buy-to-let for the first time or already own one or more buy-to-let properties, it’s a good idea to speak to an accountant about whether setting up or switching to an SPV is worth it. It may not be if you have just one property and you are a basic-rate taxpayer. The value of your properties is also relevant.
Ramneet Bains, buy-to-let mortgage specialist at online mortgage broker Habito, says, “Disadvantages to consider with SPVs are that you’ll have a smaller choice of lenders, which could mean higher mortgage costs, and you’ll also have to pay an accountant to do your tax return each year.”
On the other hand, you’ll pay corporation tax rather than capital gains tax on profits when you sell a property in an SPV, which could be an advantage.
With most lenders, you’ll pay a higher interest rate for an SPV (limited company) mortgage – you could pay 0.75 to 1.3 percentage points more depending on the length of the initial deal. The application process is likely to take longer and require more documentation. You could also pay higher fees.
Ramneet Bains says, “The Mortgage Works, which is part of Nationwide Building Society, is currently the only high-street lender that offers both buy-to-let and SPV mortgages, but if you have to go with a more specialist lender, it’s likely you’ll also pay higher mortgage fees compared to a standard buy-to-let loan.”
A benefit of taking out an SPV mortgage is that the rules on how much you can borrow are different.
With most lenders that offer a standard buy-to-let mortgage, the rent you earn must cover at least 145% of your mortgage interest if you are a higher or additional-rate taxpayer (calculated using a rate of 5.5% if your deal is not a fixed rate of five years or more). This usually drops down to 125% if you are a basic-rate payer. With an SPV product, it’s 125% regardless.
You can set up a limited company yourself on the Companies House website quickly and easily for a small admin fee. You just need to make sure you enter the correct standard industrial classification (SIC) codes, which describe what your business does, to make it an SPV. There are four different real estate ones you can use.
Alternatively, an accountant or specialist agent can set it up for you. Although this is a more expensive option, it’s a good idea if you’re not confident doing it yourself or you are setting it up as a partnership – in this case, you may need a solicitor too.
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