The Government is slowly phasing in its reduction in tax relief on finance costs for landlords. While some investors are setting up limited companies to avoid the change, remortgaging might be more effective…
From April 2017, the Government has been restricting the amount of tax relief that landlords can claim on their finance costs, such as mortgage interest. By April 2020, landlords will no longer be able to claim tax relief on these costs.
Many landlords who are looking to avoid this change may consider setting up a limited company, which are excluded from the reduction.
However, the Lettings Director of Romans estate agent, Michael Cook, has some words of warning: “The savings made by retaining mortgage interest relief may not counteract the high cost of a mortgage deal for a limited company.
“Landlords shouldn’t rush into assuming this is a safe-bet for saving money; every investor is different and what works for one may not work for another. It’s vital that you seek advice from a professional financial advisor to ensure that you really are making a saving by incorporating.”
With only a few lenders offering mortgages to limited company landlords, rates are often higher when compared to personal borrowing, negating any savings made by being able to claim tax relief.
Limited companies receive different interest rates to individual landlords, for example, a limited company can pay 3.41% for a two-year fixed rate 75% loan-to-value (LTV) deal, compared with 1.92% for an individual investor.
Repurchasing an existing property into a limited company structure also incurs Capital Gains Tax (CGT) and Stamp Duty, which would eat into the savings made from receiving tax relief on finance costs.
According to mortgage broker Private Finance, a landlord must own four or more properties for a limited company structure to be financially beneficial.
Whilst rates for buy-to-let mortgages are higher than residential mortgages, the increased competition between lenders, along with the low interest rates on offer, have led to some great deals for investors. Landlords may actually find that remortgaging in order to secure a better deal is a more cost-effective way to regain their losses.
Cook adds: “We recommend that all landlords regularly review their mortgages to ensure they are getting the most competitive deal for their circumstances.”
Have you thought about remortgaging?