With the first phase of George Osborne’s restriction of mortgage tax relief coming into effect this April, Robert Maas, Tax Consultant at London accountants, tax and business advisers CBW, gives guidance on how buy-to-let landlords can bypass the restriction.
Many, if not most, accountants think that incorporation is rarely attractive. While this reduces the tax on the interest to 19%, it increases that on distributed profits from 40% to an effective rate of 45.325% for a 40% taxpayer and significantly more if the money is taken out as salary, so attracting National Insurance.
Furthermore, it increases the tax on property disposals from 28% to an effective 35.4% and to get that rate locks the gain inside the company until it is liquidated.
If landlords want to utilise the money outside their property business without shutting it down, they may have to suffer the 45.325% rate.
A possible alternate strategy is to reduce the interest charge either by repaying part of the loan or refinancing it. The interest rate on home loans is normally less than on buy-to-let loans, so increasing the mortgage on your own home and using the extra borrowing to repay your buy-to-let loan can make sense.