I’m a pensioner with a modest income. I have some savings that I would like to invest in a buy-to-let to help boost my retirement income. 

I’ve heard that it may be beneficial if I set up a company and use that to purchase the property investment. Would this be a wise thing to do?  

Tax rules have got tighter on buy-to-let, so is it worth trying to cut your bill by owning a property through a company?

Tax rules have got tighter on buy-to-let, so is it worth trying to cut your bill by owning a property through a company?

MailOnline’s property expert Myra Butterworth replies: There is a general view that it has become more worthwhile investing in a buy-to-let through a company, since the rules on mortgage interest tax relief were changed. 

This is due to a number of benefits, including paying tax at a lower rate than any level of income tax.

Previously, landlords could claim full mortgage interest relief against income tax bills on rental profit, but this has been trimmed back to a tax credit based on a maximum of 20 per cent of mortgage interest payments. 

Under the old system, mortgage interest and other allowable expenses were deducted from rental income, with income tax calculated on the profit after these costs.

This meant 40 and 45 per cent taxpayers got mortgage interest relief in full – a highly valuable aspect of investing in property.

Under the new system, rental income is added to other income to decide an individual’s tax rate, with a maximum 20 per cent tax credit for mortgage interest applied.

This has eaten heavily into landlords’ rental profits, but buying a property investment via a company gives people a way to avoid this punitive measure.

Within a company structure, full mortgage interest can still be claimed, with tax calculated solely on profits not overall revenue, and paid at the corporation tax rate of 19 per cent. 

However, there will be extra tax to pay on money taken out of the business and buying a property via a company will not suit everyone, particularly those who have a minimal amount of other assets and income.

It’s important to do the maths, look at your overall financial situation, and work out whether it would work for you – as you could even be worse off.

Nimesh Shah, of accountants Blick Rothenberg replies: We need to start with whether a company would be right for you and our circumstances.

The benefits of buying an investment property through a company include full deduction of mortgage interest and paying corporation tax at 19 per cent – which is lower than both the level of basic (20 per cent) and higher rate (40 per cent) income tax.

The sting in the tail is that if you pay the profit to yourself via dividends, there is a further layer of personal taxation – although there is an annual tax-free dividend allowance of £2,000.

Above this, the dividend tax rates are 7.5 per cent for a basic rate tax payer, 32.5 per cent for higher rate tax payers and 38.1 per cent for those earning more than £150,000.

You also need to remember that there are costs associated with running a company, which you don’t have if you buy the property as an individual.

For example, you will need to file company accounts, complete a corporate tax return and arrange filings to Companies House every year and even a basic accountant will charge £1,200 a year.

My advice to her is ‘don’t bother’ buying the property via a company. The pensioner has no other income and it is a modest rental income here of around £800 a month. 

Even without expenses, they are not above their personal allowance (£12,500 currently). And even with some income from other sources such as from a pension, then the hassle of running a company means it is not worth it.

The company route works well if you leave the profit in the company – for example, to pay off the mortgage.

If you’re taking this income for day-to-day living costs, you have a second level of tax and so it is not worth it. You could even be worse off.

And you don’t need to worry about inheritance tax as a property worth around £250,000 is passed on without tax as it’s below the nil rate band (currently £325,000).

Even if you had more assets, then having bought the house through a company would not make a difference as it would be subject to inheritance tax in the normal way.

It also makes no difference to the stamp duty land tax that you pay. You will still have to pay the stamp duty land tax surcharge if you already own a property.

When you come to sell the property, any capital gains would be charged at 28 per cent for higher rate taxpayers and 18 per cent for basic rate taxpayers. These are the rates you’d pay if you bought the property as an individual.

In a company, you would only pay tax on the gain at 19 per cent.

It is a bit of a misconception that you need to run a buy-to-let through a company as you need to look at the other assets and income that the buyer has. You need to do the numbers as it may not be worth doing.

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