Latest research from the National Landlords Association indicates that 40% of landlords are considering forming a limited company to limit their exposure to forthcoming changes.
At present, only 1% of respondents said that they had already incorporated. The NLA has put that down to the high cost of transferring property held personally into a limited company.
The findings also show that 31% of landlords have no intention of moving their portfolio to a limited company. 29% are still unsure about what they are going to do in regards to incorporation.
Mortgage interest relief for buy-to-let landlords will be capped at the basic rate of income tax (20%) by 2021. This will begin to be phased back from April 2017. As a result, landlords will no longer be able to deduct the cost of mortgage interest before declaring their taxable profit. Instead, they will receive a tax credit of 20% of their mortgage interest costs.
The National Landlords Association has coined the alterations, ‘The Turnover Tax,’ as landlords’ tax will be calculated on the rental income they earn. This is instead of their profits and will force many basic rate payers up into a higher tax bracket. Higher rate payers will be left with substantially larger tax bills.
Landlords structured as companies will be exempt from the alterations. Instead, they will pay corporation tax on their profits alone.
‘Transferring personally held property to a limited company isn’t a straightforward process, so it’s not surprising that so few have taken this action so far,’ observed Richard Lambert, Chief Executive Officer at the NLA. ‘Landlords need to do their research but many will realise that incorporating simply doesn’t stack up financially; doing so will incur capital gains and potential stamp duty charges, which means the process may be prohibitively expensive.’
Richard Price, Executive Director of the UK Association of Letting Agents, also said, ‘while just one per cent have incorporated so far a significant proportion are still considering the move. If landlords follow through with these intentions then it’s likely that more and more will take a hands-on approach to managing their portfolios in the future, which would mean less business to go around for agents and certainly less of a need for full service offerings.’
‘The changes to taxation are forcing landlords to re-evaluate their business and their place in the market, so our advice for agents is to begin talking to your clients about their intentions over the next few years and consider how you’ll meet their changing needs in a way that is distinct from your rivals,’ Price concluded.