Buy-to-let landlords will face a significant tax increase from April as Chancellor John Healey announced a double tax hike in the Budget on Wednesday. Basic-rate taxpayers will see their tax on rental income rise to 24 per cent from 20 per cent, higher-rate taxpayers to 44 per cent from 40 per cent, and additional-rate payers to 49 per cent from 45 per cent. This follows a two percentage point increase announced last year by Rachel Reeves. Industry experts and the Office for Budget Responsibility have warned the move risks forcing out professional landlords and those relying on rental income for retirement, potentially triggering a steady rise in rents.
Many landlords say they have been caught in a triple attack on profits in recent years, facing high mortgage rates, tight regulations and successive tax rises. Some are reconsidering their investment strategy entirely. One retired solicitor in her 70s reduced her portfolio from 12 properties around Norwich in 2016 to three today, estimating she is several thousand pounds worse off over the past decade due to reduced rental income and extra costs for upgrades and repairs. She describes the latest tax increase as another nail in the landlord coffin.
To weather the tax changes, some landlords are exploring holding properties through a limited company structure rather than personal ownership. For properties in a company, corporation tax applies at 19 per cent for profits up to £50,000 and 25 per cent for profits over £250,000, with full mortgage interest relief available. According to Elliot Castle of We Buy Any Home, a property generating £25,000 annual rental income with £8,000 mortgage interest would leave a personal owner with £7,360 after tax from April, but a limited company would retain £12,960. If withdrawn as a dividend, the landlord would take home £8,506, leaving them £1,146 better off using the company structure.
However, the limited company approach has drawbacks. Mortgage rates on company-owned properties typically run 0.5 percentage points higher than standard buy-to-let rates, and companies face a 5 per cent stamp duty surcharge when purchasing. According to Mark Levitt of accountants Blick Rothenberg, the structure works best for higher-rate and additional-rate taxpayers with mortgaged properties building a portfolio. Those with only one or two properties, without mortgages, or needing to live off rental income may find personal ownership more advantageous.
Setting up a limited company is relatively straightforward, according to Levitt. Landlords register via the Government website for £100, typically receiving confirmation within 24 hours, then establish a company bank account and register for corporation tax within three months. Alternatively, those keeping personal ownership can maximise available reliefs, including deducting expenses such as maintenance, insurance and letting agent fees, plus claiming up to £1,000 tax-free property allowance annually.
For landlords exploring buy-to-let mortgages, rates remain elevated. The average five-year buy-to-let residential rate stood at 6.05 per cent on Friday according to MoneyfactsCompare, though some lenders offer lower rates such as NatWest at 5.08 per cent with a 40 per cent deposit.