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Why Buy-to-Let landlords are setting up as limited companies to avoid tax rises

Written by: John Padgett on Tuesday 11/04/2017

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April 2017 sees the introduction of changes to the tax system for Buy-to-Let (BtL) landlords. In the light of these changes some are setting up limited companies in which to hold their property portfolio. We examine why they are doing this and whether it’s right for everyone.

What do the changes mean?

In 2015 the then Chancellor of the Exchequer, George Osborne, announced in his budget that he would be capping tax relief on BtL mortgages. His reasoning was that landlords who had built a property empire prevented first time buyers from getting on the ladder, exacerbating the housing crisis facing the UK.

The results of these changes, which will be phased in over four years, mean that BtL landlords who have properties registered in their own name will not be able to claim back as much mortgage interest relief as they did previously. This will increase their tax bills significantly if they are in the 40% and 45% tax brackets. Instead of being able to claim back 40% or 45% of the costs on their mortgage interest, they will, from April, only be able to claim back 20%.

Why set up a company?

If a landlord structures their property portfolio as a limited company, it will be exempt from this forthcoming cap and they will only be required to pay corporation tax on the company’s profits – currently corporation tax is at 20% but is due to fall to 18% by 2020.

Increasing numbers of BtL landlords are selling their property portfolios to companies which they have set up specifically in order to avoid paying the higher rate of tax.  

The advantages of such vehicles include being able to claim the running costs of the BtL investments as ‘allowable expenses’ – offsetting the costs of any mortgage payments, wear and tear on the property, maintenance costs, letting fees and more.

Would you benefit?

A limited company in which to hold your commercial property may seem like a good idea but there are associated costs involved which may deter some people. Most notable of these is the possibility of paying capital gains tax on the sale if the value of the property has risen since its original purchase. This can range from 18% for a basic rate tax payer or 28% for a higher rate tax payer.

Stamp duty may also be payable on the purchase of the property by the company – since April 2016 this has also attracted a 3% surcharge on BtL purchases.

In addition, since the property has changed ownership from a person to a company, the terms of any mortgage will have changed too. This can mean that the company may face an early repayment charge, a fee for remortgaging as well as legal and valuation fees.

A limited company as a vehicle for your commercial property portfolio may work for you but will depend on your individual tax circumstances. It is vital that you seek professional advice before committing to such a process. If you need specialist accounting or tax advice talk to a member of our team.

Written by: John Padgett on Tuesday 11/04/2017

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