Introduction
Since April 2020, the landscape for UK property investors—particularly buy-to-let landlords—has changed dramatically. This shift is primarily due to the phasing out of mortgage interest relief, a move that has had a major financial impact on higher and additional-rate taxpayers.
What Changed in April 2020?
Before April 2020, individual landlords could deduct 100% of their mortgage interest from their rental income before calculating taxable profits. This allowed higher-rate taxpayers to reduce their income tax bill significantly.
However, the UK government gradually phased out this relief between 2017 and 2020. As of April 2020, landlords can no longer offset mortgage interest in this way. Instead, they receive a flat 20% tax credit on interest payments, regardless of their income tax bracket.
Why This Affects Higher Earners
This change has hit higher-rate (40%) and additional-rate (45%) taxpayers the hardest because they can no longer claim mortgage interest as a direct expense, their taxable income from property increases, leading to higher overall tax bills.
For example, a landlord earning £30,000 in rental income with £20,000 in mortgage interest will now be taxed on the full £30,000, not £10,000 as before. The 20% tax credit helps, but it’s often not enough to offset the additional tax liability.
The Rise of Incorporating Property Portfolios
To counter these tax hikes, many landlords are now setting up limited companies to hold their property portfolios. This strategy offers several advantages:
– Full Mortgage Interest Relief: Within a company structure, mortgage interest remains a deductible business expense.
– Lower Corporation Tax: Companies pay corporation tax (currently 25% as of 2024), which is often lower than personal income tax for higher earners.
– More Scalable Structure: Incorporating allows for better planning when expanding a portfolio or taking on new investors.
Considerations Before Incorporating
While incorporation offers tax advantages, it also comes with responsibilities and trade-offs:
– Administrative Overhead: Running a company requires statutory filings, annual accounts, and possibly hiring an accountant.
– Financing: Some lenders offer fewer or more expensive mortgage options for limited companies.
– Profit Extraction: Taking profits out of the company (e.g., through dividends) can trigger additional tax liabilities.
– Capital Gains Tax (CGT): Transferring properties to a limited company could trigger CGT and Stamp Duty Land Tax (SDLT) unless properly structured.
Is Incorporating Right for You?
Whether incorporation makes sense depends on your portfolio size, income level, and long-term goals. Many investors with smaller portfolios or lower incomes may not benefit enough to offset the additional complexity. However, for larger portfolios or higher-rate taxpayers, incorporation can be a financially sound strategy.
Final Thoughts
The post-April 2020 tax changes have significantly altered how UK property investors, particularly buy-to-let landlords, manage their investments. Driven by the UK landlord tax changes 2020, incorporation isn’t a one-size-fits-all solution, but it’s an increasingly popular strategy for mitigating higher tax bills and future-proofing property portfolios.
Before making any structural changes, consult with a property tax advisor to evaluate your specific circumstances.
