Landlords Setting Up Companies as Tax Hikes Hit

Recently, we reported on how changes to landlord tax are being phased in from this month. As a result, no private landlord will be able to claim more than 20% tax relief, regardless of whether or not s/he pays income tax in a higher bracket.

Now, in a twist in the tale, it seems that some landlords have found a way around the problem: setting up their own property companies.

As the Mortgage Finance Gazette reports, 77% of buy-to-let mortgage applications in the first quarter of this year were made by limited companies. This is a rise of 8%, when compared with the last quarter of 2016 – and a staggering 56% since the tax changes were announced in the Government’s 2015 Summer Budget.

The new tax regulations, which were set up to help make landlord taxation fairer, do not apply to businesses, meaning that there are benefits to be had for those who hold their property portfolios in a company. Of course, limited companies are still required to pay taxes, but they pay a flat 20% rate on their profits, which is set to reduce a further 2% by 2020. In addition, companies can claim back tax on the cost of running their properties, termed ‘allowable expenses’, therefore reducing the tax bill further still.

In other words, for landlords who pay tax in the higher brackets, there are savings to be made through registering as a company.

Sounds like a solution that’s too good to be true? Well, it is, in the sense that it won’t be worthwhile for everyone. Although company registration is not too expensive in itself, landlords can be faced with paying further stamp duty and capital gains tax for transferring properties they already own to a company name. Typically, it makes more sense to set up a company before buying a property because the transfer route can be prohibitively expensive.

For those who already own one or two properties, then, taking the route of setting up a business probably won’t be worth it.

What might this mean for the average landlord? Some may be forced to sell their rental properties, if their profits drop significantly due to the tax changes, which come hot on the heels of last year’s buy-to-let stamp duty increase.

One area in which landlords can rest easy, however, is that of demand. While taxes may be on the increase, would-be renters are still clamouring for the properties available on the market. In Manchester in particular, properties continue to be rented out faster than they can be supplied, meaning that there is always a tenant waiting.

So it’s not all doom and gloom – it’s just a case of landlords finding a path through property investment that suits them.

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