Six in Ten Landlords Invest Through Limited Company to Avoid New Tax Rules

Over six in ten landlords are now investing in property through a limited company structure, in order to avoid new tax rules.

Restrictions on buy-to-let mortgage interest tax relief, announced by former Chancellor George Osborne in last year’s summer Budget, threaten to hit thousands of landlords with bigger tax bills.

However, the new tax rules will not apply to landlords who operate as a limited company, rather than an individual.

Check out our guide on how the new tax rules will affect you:

Figures from specialist broker Mortgages for Business show that the number of applications for buy-to-let mortgages made by businesses have tripled in the past year.

Six in Ten Landlords Invest Through Limited Company to Avoid New Tax Rules

Six in Ten Landlords Invest Through Limited Company to Avoid New Tax Rules

Limited company applications now account for 63% of all landlord loans, up from just 21% before Osborne announced the crackdown in July 2015.

This includes both investors making new purchases and landlords setting up companies to sell their existing properties to.

The Chief Operating Officer at Mortgages for Business, Steve Olejnik, comments: “Going forward, we expect the number of landlords using limited companies to rise, because it will be more tax efficient for the majority to buy property this way.

“Following new guidelines, landlords borrowing in their own names may find that they are unable to borrow as much, and will certainly be subject to stricter affordability checks.”

At present, landlords can claim tax relief on mortgage payments at the rate they pay income tax – up to 45%. But from April 2017, this will be gradually reduced to 20% over a four-year period. The new tax rules will make buy-to-let unprofitable for many landlords, while some may even see losses.

Alongside this change, buy-to-let landlords are now required to pay an extra 3% in Stamp Duty when they purchase a property.

Additionally, from January next year, banks and building societies must introduce tougher affordability checks, to ensure borrowers could endure a sudden interest rate rise. Olejnik believes that many landlords could be refused a loan as a result.

By contrast, investors who hold properties in a limited company will continue to benefit from full tax relief. This is because they will be able to offset all costs of running their buy-to-let properties as an allowable expense, including mortgage payments.

They then face just 20% corporation tax on profits, rather than income tax of up to 45% paid by individuals.

Limited company owners could also benefit from more relaxed affordability checks, as lenders will take into account the fact that they will still benefit from tax relief. However, landlords must be aware that properties purchased through limited companies will still incur the higher rate of Stamp Duty.

The number of mortgages on offer to limited companies has also risen, to 195. Meanwhile, the average interest rate has dropped, to 4.3% – or one percentage point higher than the average rate paid by individual investors.

David Hollingworth, of mortgage broker London & Country, says: “We could well see more lenders start to offer buy-to-let loans to limited companies, as more investors choose to go down this route. However, setting up a limited company is far more complicated than owning a property in your own name, and there are costs involved.

“Investors will also need to file annual returns and accounts. Anyone considering this option must get professional advice to make sure all the maths work out.”

Are you thinking of investing through a limited company structure to avoid the new tax rules?

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