Landlords in a Squeeze: How to Make Sure the Taxman Doesn't Take Your Last Penny

The buy-to-let property market has seen some significant changes lately, with landlords having to navigate challenging market conditions and less favourable tax regimes.

However, many are not taking this lying down and are looking at ways to protect their profits. In fact, according to recent analysis, a whopping 47,000 new limited companies were set up by buy-to-let landlords in the last 12 months, marking a 14% increase on the previous year.

So, what's behind this surge in incorporations? Simply put, tax changes. Over the past few years, the tax benefits of holding a residential rental property personally have been reduced, which has impacted the bottom line of many landlords. Interest on a buy-to-let residential mortgage can only be partially offset against income tax and is limited to the 20% basic rate of income tax. When a residential buy-to-let is sold, landlords also face higher capital gains tax rates than most other asset disposals, with rates of 18% and 28% for basic-rate and higher-rate taxpayers, respectively.

Additionally, buying another rental property also attracts higher stamp taxes that are dependent on the property's location. Alongside the less favourable tax environment, landlords are also grappling with higher interest rates, stricter buy-to-let property rules, and higher environmental standards.

Despite these challenges, landlords can take a range of measures to protect their profits. Some are raising rents to reflect additional borrowing costs, while others have chosen to refinance their portfolios with higher deposits to access lower interest rates. Holding future residential buy-to-let investments in a limited company or incorporating an existing buy-to-let portfolio is another option to make the business more tax-efficient.

For landlords facing reduced profits, now is a good time to seek professional advice and to make sure their business is as tax-efficient as possible. The decision to hold or purchase property as an individual or as a company is significant, and no single strategy or plan can be applied to every situation. In some cases, it may be beneficial to deleverage and reduce the number of properties held if important tax reliefs are not available on incorporation.

Overall, it's clear that the current economic, regulatory, and tax environment presents a challenging landscape for many buy-to-let landlords. However, by taking proactive measures and seeking expert advice, landlords can protect their investments and explore alternative options, such as investing in more liquid assets like shares or bonds, particularly when done through a tax-efficient wrapper like a pension or ISA.

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