Undoubtedly, times are changing for residential landlords.
This month alone has seen the implementation of additional stamp duty surcharges of 3% on buy-to-let purchases, alongside changes to the wear and tear allowance.
In April 2017, there will be further restrictions on mortgage interest tax relief and the Bank of England has called for tighter lending criteria on buy-to-let borrowers.
These mortgage relief restrictions will see those who own the investment property directly affected. Top rate payers will see the amount of tax they can deduct from their earnings cut from 45% to just 20%. However, companies that invest in residential property only pay a fixed rate of tax.
As such, many property professionals are advising landlords to incorporate in order to save money on tax.
Are you a landlord looking to incorporate? And should you take the chance?
Well, for many landlords, there is little financial sense to incorporating an existing portfolio. In effect, you would have to ‘sell’ your property to a new company, which would still incur stamp duty land tax as a result. Savings made on mortgage relief are unlikely to cover the cost of additional 5-15% stamp duty for a long time.
In some circumstances, Stamp Duty Land Tax is not payable, but for many investors like yourselves, this tax is compulsory. What’s more, you run the risk of triggering capital gains tax, should you not be able to gain incorporation. Of course, you will have to take out different landlords insurance too.
Monthly rental yields for your company could well be higher, as you will not be paying higher rates of tax. On saying this, private landlords normally come out on top financially once dividends or capital gains tax following the sale of a property are taken into account.
To realise the assets of a company, the company must either:
- issue a dividend, or
- be liquidated, which will trigger CGT on distribution that has been subjected to corporation tax
Mortgages are also notoriously harder to obtain for companies and are subject to commercial rates, in effect ending gains obtained by mortgage relief.
Should you be looking at incorporating, our advice for landlords would be proceed with caution and do the maths before making any decision. Check that your landlord insurance will cover you and always make sure you have a sound knowledge of any legislation changes either implemented or in