Contractors' Questions: How to rent out a property as a 'Ltd' contractor?

Contractor’s Question: I've read on ContractorUK about buy-to-let investments but still can’t tell which is the most tax-savvy way of renting a property when operating as a ‘Ltd’ company contractor.

I plan to live at the property initially and then seek permission to let for roughly one year while I work in a different city. I'm currently paying myself below the threshold so would this just mean that the rental income would be added on to the salary I'm paying myself?

If it helps to know, I anticipate the interest rate to be around 3.5% with mortgage repayments coming in at roughly £600/month, versus a rental income of £675/month so I wouldn't be making any rental profit really; it would just cover my mortgage. Please advise.

Expert’s Answer: Firstly, if it is this most recent article on ContractorUK about buy-to-let for contractors that you are referring to, some of it might well be applicable to you.

Looking specifically at the section ‘How to beat the clawback,’ it is probable that one way to reduce your cost burden of your mortgage is to remortage to one with lower interest rates.

The second workaround relates to transferring to a spouse and utilising or spreading the tax bands. While you can consider this option, it is likely to be more effective to contractors who are renting out a property longer term. To truly know if it’s worth your while, you would need to weigh up the costs involved, such as stamp duty and legal costs, and pit them against any potential tax saving. Look too at your spouse’s ability (compared to yours) to borrow for the mortgage.

The third workaround listed in the article concerns using a limited company for buy-to-let. You should be aware that mortgage options from lenders can be fewer via a company and there would be transfer of ownership costs. Again, the short-term nature of your let may render these costs as not in your financial interest

Generally-speaking, the drawbacks of investing in property in the way you propose is that there is little to no relief available for the income received, and little to be done to mitigate tax.

In your situation, you would be liable to income tax on the rental income received for the period the property is let, and given changes being imposed from this tax year you will only be able to offset 75% of the mortgage interest against basic rate only. The relief on mortgage interest is set to reduce year-on-year between now and 2021, as we and the government have outlined.

In practical terms, it means that only mortgage interest is ever an allowable expense, so if your mortgage interest is, say, £100pm and your rental £200pm then 75% of the mortgage interest for this tax year would be deductible. So £75 is a deductible expense from 200pm perceived income.

Without knowing more about your situation, it is difficult to know if the ‘Ltd’ company could help, in practical or tax terms. This is because you only intend to let short term the costs of transferring the property to the business, and this would likely outweigh any marginal benefit to that. Besides, taxes are still payable by the company. So in this instance, a limited company is unlikely to be the solution.

The bottom line is rent is taxable and you can only reduce the burden by keeping your total income within basic rate thresholds during this time. The overall threshold including personal allowance is £45,000 total income, inclusive of salary, dividends and rental will need to be below this. Good luck!

The expert was Angela James, a director of Contractor Financials.