How To Slash Buy-To-Let Investment Tax In 2022

Wednesday 20 April 2022

Written by Barry Soraff

How To Slash Buy-To-Let Investment Tax In 2022

How To Slash Buy-To-Let Investment Tax In 2022...

Buy-to-let investment remains as popular as ever, despite the changes in recent years designed to dis-incentivise the “small” landlord by increasing the tax taken from them, making the regulatory environment more complex and introducing a number of policies aimed at taking the heat out of the market. As a result, the need for tailored, specialist advice is greater than ever. Take this typical example for instance:

“John” is employed earning £95,000 and has decided to invest some savings into buy-to-let residential investment property. He has no other income. The property will generate a rental income of £25,000, he has costs including management fees of £5,000 and mortgage interest of £15,000 on an interest-only buy-to-let mortgage. His tax bill without the rental income in the tax year 2021/22 would be £25,432 – add in the £5,000 of net property income and his tax bill rises to £33,432, a tax rate of 160% on the rental income!

Of course, this is an extreme but not unusual example of what can happen. If the mortgage was not interest-only, the situation would be even worse as capital payments do not enjoy tax deductions.  

This ludicrously high tax rate is a result of both the way in which interest relief is provided, and the gradual withdrawal of personal allowances for anyone who has income in excess of £100,000. So, assuming John was advised properly, what options would he have?

First and foremost, we should consider John’s family situation. John is married to Jane who works part-time earning £20,000. If the income belonged to her, the tax bill on the £5,000 of income would be £1,000 i.e. 20%. This is a saving of £7,000 per annum in tax. If John had sought proper advice, he would have been told to allow Jane to buy the property instead.

However, if for whatever reason John decides that he wants to purchase the property, what other options might he consider?

He might look at using a limited company to do the investment. This would reduce his tax exposure on the rental income to £950, although, should he wish to withdraw the money from the company, there may be additional taxes due. If the full amount was paid to him as a dividend from the company after this tax bill, he would pay a further £666 - making the total tax bill £1,616 (32.32%). This is still an annual saving of £6,384.

Even so, in the medium term, that secondary tax bill should be capable of mitigation by repaying his initial equity to him and/or giving shares in the company to his wife to withdraw some of the dividends.  

There are some additional considerations with a company strategy. For instance, filing accounts and handling tax compliance will undoubtedly incur higher costs, albeit those would likely be nowhere near the amount of tax he has saved. Those would also diminish if John decided to continue to invest in more buy-to-let property – the tax savings would increase but the costs would likely not.

We would also need to consider the planned increases in company tax rates, even though these will not impact John as his company’s net income will not exceed £50,000.

These are just a small example of the number of ways buy-to-let investors can save on tax. The situation becomes more complex still for different types of property related investments – commercial property, development land and mixed use will all provide different tax outcomes and offer different opportunities. The message therefore is to get advice before dipping your toes in this market. It is a minefield of lost opportunity and I’d hate anyone to pay too much tax unnecessarily.

If you would like to discuss this further please don't hesitate to email me at or click here to get in touch.

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