Dividend tax rate rises could impact limited company landlords

Dividend tax rate rises could impact limited company landlords

According to Mortgages for Business, the increase in dividend tax could impact landlords using limited company structures as they pay themselves and other shareholders dividends from rental profits.

Dividends up to £2,000 are tax-free but anything above that is taxed. In April, the basic rate for dividend tax will increase from 7.5 per cent to 8.75 per cent, whilst the higher rate will go from 32.5 per cent to 33.75 per cent.

The additional rate will increase from 38.1 per cent to 39.35 per cent.

A higher number of landlords have used limited company structures over the past few years since tax relief reductions on buy-to-let were introduced in 2016.

Research from Hamptons last year showed that between 2016 and 2020, there were more limited companies set up to hold buy-to-let (BTL) properties than in the prior 50 years.

Using a limited company to hold BTL property offers some tax benefits, such as not having to pay income tax on rental income, and corporation tax is lower. Expenses can also be deducted.

Jeni Browne, sales director at Mortgages for Business, said the benefits to using limited company structure included paying corporation and dividend tax over income tax on rental profits.

She added that there was more flexibility around inheritance planning, and they can appoint family members as shareholders.

Browne said: “The changes to dividend tax will likely increase limited company landlords’ tax bills. If you’re concerned, speak to your professional tax advisor, as they will be able to crunch the numbers for you and give a definitive answer as to whether you need to make any changes to your investment structure or plans.

“If you want to counter any lost profit, contact an expert mortgage broker to see whether you can get a better deal on your mortgage to help boost cashflow.”