Dear Valued clients and friends of Watermill,

In recent years, the regulations have changed, requiring much more planning if you want to invest in property. That’s why we’ve compiled this essential A to Z guide, designed to help you master these critical aspects and boost your investment returns while ensuring full compliance.

Unlocking the Potential of Buy-to-Let Limited Companies

Limited companies, acting as separate legal entities from their owners, bear their own tax and accounting responsibilities. This structure is particularly prevalent among property investors who engage in buying, selling, and renting properties. Understanding the financial and tax obligations of your investment entity can significantly impact your success.

How Watermill Accounting Simplifies Your Financial Management

At Watermill Accounting, we understand the challenges landlords face. Our tailored Accounting and Tax service, now available for just £200 a month, is crafted to streamline your financial operations, offering many benefits that modernise and simplify the accounting process.

Key Considerations for Property Investors-

  1. Tax Implications: Your investment strategy can significantly affect your tax position. Whether investing personally or through a company, it’s crucial to understand how this affects your income tax, SDLT, and potential tax savings.
  2. When Taxes Are Due: Taxes are incurred at different stages—upon purchase, during profit generation, and upon sale. Each stage requires careful financial planning to maximise tax efficiency.
  3. Benefits of a Limited Company: Investing through a limited company can offer numerous tax advantages, including lower capital gains on share sales and the ability to deduct mortgage interest from rental profits.

Here’s a breakdown of the main components and factors affecting how your property investments are taxed:

1.Income Taxation:

  • If you invest as an individual, any profits from your buy-to-let properties are added to your other income (such as salary from employment), which could potentially push you into a higher income tax bracket. This means that your rental income could be taxed at 20%, 40%, or even 45%, depending on your total annual income.
  • Investing through a limited company, however, means that profits are subject to Corporation Tax, which is charged at different rates depending on the profit level. The rates are currently 19% for profits under £50,000, and a tiered rate applies to profits between £50,000 and £250,000 with marginal relief smoothing the transition to the main rate of 25% for profits above £250,000.

2.Stamp Duty Land Tax (SDLT)

  • SDLT is payable on the purchase of properties over a certain value. The amount of SDLT depends on several factors including whether the property is in England or Northern Ireland, the price of the property, and whether it’s an additional property, which incurs higher rates.
  • SDLT rates have various bands, and additional properties typically attract a 3% surcharge over the standard rates. It’s important for landlords to calculate the exact SDLT due at the time of purchase to avoid unexpected costs.

3.Capital Gains Tax (CGT):

  • CGT is charged on the profit (the ‘gain’) you make when you sell a property that has increased in value. It’s the gain you make that’s taxed, not the total amount of money you receive.
  • For individual investors, CGT rates on property are 18% or 28%, depending on your income tax band. However, if you own the property through a company, the company pays Corporation Tax on the gain, which might be at a lower rate, especially if you can sell the shares of the company instead of the property itself, potentially attracting only 10% or 20% tax on the gain under the Business Asset Disposal Relief (formerly known as Entrepreneurs’ Relief), if conditions are met.

4.Other Considerations:

  • Mortgage Interest: Previously, landlords could deduct their mortgage interest from rental income before calculating tax. However, this relief has been phased out for individual landlords and replaced with a tax credit worth 20% of the mortgage interest costs. Companies can still deduct mortgage interest before calculating their taxable profits.
  • Wear and Tear Allowance: This has been replaced by a new system that only allows landlords to deduct the costs they actually incur on replacing furnishings in the rental property.
  • Rent-a-Room Relief: If part of your home is rented out (such as a single room), you can earn up to a threshold amount tax-free per year.

In essence, the way you structure your property investment can have significant implications on your tax efficiency. Each decision should be made with a clear understanding of both current tax regulations and anticipated future changes. Employing a knowledgeable accountant for property investment can help you navigate these complexities effectively.

Each of these stages requires careful consideration and planning. To ensure compliance and optimize tax efficiency, it’s advisable to consult with a tax professional or accountant who specializes in property investment. We can provide tailored advice based on your specific circumstances and help you navigate the complexities of property taxes effectively.

Contact our dedicated support team for more information on how we can help transform your property investment experience.

Best regards,

Deepti Agarwal ACA
Watermill Accounting
Guildhall, Market Square, Cambridge