As reductions in tax relief, increases in stamp duty and increasingly stringent lending criteria on buy-to-let mortgages continue to place a toll on profits and investment opportunities, more and more landlords are choosing to incorporate their businesses and reap the tax benefits which are available to limited companies.
Under previous rules, landlords had been allowed to deduct mortgage interest and other expenses from their rental income before calculating tax liabilities, thereby allowing mortgages to be paid off before rental income was declared. However, under current legislation, interest relief is subject to an annual reduction of 25%, with landlords set to pay tax on entire rental incomes from 2020 onwards (although they will receive tax credits equal to 20% of their interest costs). This, in turn, could push many thousands of investors into higher rate tax brackets, incurring further costs and decimating already overstretched margins.
Yet, landlords who operate as a limited company are exempt from individual tax rate provisions, with company finances paid at a flat rate corporation tax of 19% (and set to fall to 17% from 2020 onwards). In addition, interest payments are treated as business expenses which can be offset against profits. Indeed, it is estimated that a limited company landlord with an annual rental income of £15,000 PA on a property valued at £300,000 (and a 75% LTV mortgage) would receive over £3,000 more per year than a residential landlord paying at a higher rate of tax – a considerable difference.
Any exodus of smaller, residential landlords from the market over the past few years has been matched by a corresponding explosion in limited company business. For example, recent research has revealed that the number of mortgages completed by individual landlords has fallen sharply in the past few years, with 34% recorded in the first two quarters of 2018 as opposed to 68% for the same period of 2015 – a 50% decline.
By contrast however, the number of limited company BTL mortgages has doubled over the same period from 32% to 64%, with these trends to continue in the future. Moreover, as the number of products aimed at limited companies continues to rise to a 12 year high, with 467 primarily specialist mortgages currently available to landlords not using special purpose vehicles), it is becoming more and more apparent that the limited company model has become the new ‘normal’ for many landlords.
Expert advice from a property tax specialist should be sought by all landlords considering the limited company model.
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