Landlords are setting up limited companies ahead of the 2017 tax changes, which will see buy-to-let tax relief being phased out. Although the costs of setting up a company are steep, landlords will pay less tax in the long run, so it makes sense for larger buy-to-let investors to make this move now. They set up a company which then buys their properties, so effectively they are selling their investment to themselves.
The government is capping the tax relief on buy-to-let mortgages from 2017, with the idea of making buy-to-lets less attractive. This, it is hoped, will ease the housing crisis by freeing up properties for homeowners and first-time buyers. However, by putting the properties into the hands of their own company, property investors can run buy-to-lets as an expense and write off the cost of their mortgage, maintenance, repairs and agents’ fees. They will be taxed on profits at a rate of 20 per cent, but this is due to be cut to 18 per cent by 2020.
Chris Bramham, of finance broker Brightstar Financial, said they have seen the number of properties being bought or remortgaged by a limited company rise by 40 per cent in the past year.
Obviously, it is important to weigh up the pros and cons of such a move. Selling a property will involve capital gains tax, if its value has risen, and stamp duty will also need to be paid. It is imperative to take professional advice from a tax advisor or accountant, to see if it is the right thing to do in your circumstances, but it is certainly proving to be the answer for many investors with large portfolios. It is also an opportunity to consolidate a number of individual buy-to-let mortgages into a single loan, or a chance to raise capital to buy more properties.
The tax relief changes are being introduced gradually over three years,which means there is plenty of time to do the research before making a decision. Paul Brett, of buy-to-let lender foundation Homeloans, said lower rate taxpayers would not benefit, but professional landlords or those paying tax in the higher brackets could. Another option is to leave existing portfolios in your own name, but set up a limited company to buy any new properties.
In any case, it could be prudent to wait for the outcome to the legal challenge into the new tax rules. Cherie Booth QC is acting for buy-to-let landlords who want a judicial review into the tax changes, and this will be heard in the Royal Courts of Justice in London on October 6. The campaign is being run by landlords Steve Bolton and Chris Cooper, who fear the tax changes will push up rents or force landlords to sell up. Part of the argument is that the rules are against European law, which prevents governments favouring one type of landlord. Under the new rules, landlords owning properties in their own name would be affected but properties owned through companies would not.