A Ltd way forward?

The decision by the Government to curb tax relief on buy-to-let properties could impact the 1.8m (as at 2014) of the UK’s landlords. With changes introduced in April 2017 to limit tax relief, many landlords are completing mortgage applications at Limited Companies to mitigate the financial implications, as laid down by previous Chancellor George Osborne.

By investing in properties in company names, rather their own names has seen a substantial rise in recent months. In fact, 33% of all applications for mortgages since October 2015 have been made in the name of Ltd company. In total 62% of all mortgages are in the name of a business.

1.8m Landlords in the UK

Kent Reliance’s Buy to Let Britain report found that a large number of landlords had changed the way they managed their properties to counteract the change, with many switching to running their portfolio through Ltd company status. Four in ten of the landlords expected to increase rents in the next six months, with three-quarters saying they would do so to offset the reduction in tax relief on mortgage interest. The average rent rise buy-to-let investors anticipated was 5.6%, or £49 a month.

This move demonstrates the intelligence from landlords to maximise their investment to ensure the annual return they receive from their property portfolio continues to bear fruit. Landlords have calculated the following:

  • Landlords whose property portfolio is owned through a Ltd company will still be able to deduct mortgage interest at their year end
  • Thus landlords will only be liable for 20% corporation tax, instead of the potentiality of higher rate income tax of up to 45%.
  • As things stand, Ltd companies with in excess 15 properties (or more) are currently exempt from the tax increase.

In fact, buying through a Ltd company is now the defacto move for many landlords and new applications for mortgages, and you can understand why. With the new regulations, all landlords – regardless of the amount of properties you have – will face an extra 3% stamp duty charge on new purchases. It will get worse too; from 2020, higher taxes on rental income will impact all landlords further.

Let’s remember, buy to let properties encapsulate every additional property over your nominated, primary residence. So, that includes any property, from your holiday home in Cornwall, your student lets and multiple properties in one town; the list is literally endless.

But in last year’s July Budget, George Osborne announced a plan to scrap the ability to deduct mortgage interest.

An easy decision?

On the face of it, moving your properties into a Ltd company is a easy decision. Some may call it a “no brainer”. No so, as this case study demonstrates.

Case study

John Harvey decided to buy a property in 2014 in the city where his daughter was going to University – Canterbury.  Rather than going through the mortgage application of his own name, there is now a web of administration that makes official the owning of an additional property

  • John had to establish a Limited Company with Companies House. Your accountant can manage this for; there will be costs for the accountants time and the minimal cost for Companies House.
  • John will also have to appoint directors, allocate shares, establish a company address, file of Memorandums of Understanding and then file accounts every financial year

The property cost £269,500. He had to pay stamp duty and he also now must pay capital gains tax.

The costs and level of administration has been an eye opener for Mr Harvey; he’s sure this could affect “hobby” portfolio investors, as he explains: “The layers of officialdom has become ridiculous, it’s just the right side of keeping me sane. Clearly, the Government are keen to neuter the money you can raise through multiple properties, however, mortgage companies offer the same mortgage rates to private individuals as Ltd companies, and with property within a company clearly an asset is good for business. What is encouraging is the inventiveness of landlords to circumvent the rules. I believe the Government is 12-15 months behind landlords.”

As more tax changes are introduced for 2020, the fear is that landlords profits could be eradicated. Will landlords be forced to invest elsewhere? It’s unlikely. The returns on property are still evident, especially as the housing market is on a bounce after the “non-event” of the effect of Brexit.  We’ll continue to report on this, the closer we get to the April 2017 deadline.