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Incorporating “doesn’t stack up” for majority of landlords, says NLA

Four in 10 landlords (40%) are either seriously considering forming a limited company in order to limit their exposure to changes that will restrict mortgage interest or will be looking into the option in the coming months, according to latest research from the National Landlords Association (NLA).

However, the research found that so far only 1% had actually incorporated. The NLA says this can be explained by the high cost of transferring property held personally into a company.

The findings also show that three in 10 (31%) landlords have no intention of moving their portfolio to a limited company, and that 29% still unsure about whether they will incorporate or not.

Mortgage interest relief for individual residential landlords, which will be restricted to the basic rate of income tax (20%) by 2021, will begin to be phased back from April 2017.

The changes will mean that landlords will no longer be able to deduct the cost of mortgage interest before declaring their taxable profit, and will instead receive a tax credit of 20% of their mortgage interest costs.

The NLA has labelled the changes the “Turnover Tax”, because landlords’ tax will be calculated on rental income they earn, rather than their profits, forcing many basic rate payers into a higher bracket and leaving higher and additional-rate payers with considerably bigger tax bills. 

Landlords structured as companies will be exempt from the changes, instead paying corporation tax – currently 20% – on their profits alone.

Richard Lambert, chief executive officer at the NLA, said: “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.

“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.”

  • Jason McClean

    Exactly my position, incorporating costs more in short, medium and long term in my book. And companies will be next on the hit list from Osborne if he really wants to clamp down on letting and encourage home buying.

    Peter Meczes

    I hope I don't sound naive but I wonder whether the taxman would accept the number of AST's an individual landlord (IL) has rather than the number of properties owned? As I understand it the new loss of tax relief will only apply to IL's owning 15 or less properties. But one may own say 4 HMO's with 20 tenants all on separate AST's. Therefore they may have more tenancies than someone with more houses. Any ideas?

     
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    You will also find it hard or impossible to borrow in a limited company without trading for a while

  • Bill Wood

    I have put 3 of my 8 properties into a newly formed limited company mainly to keep me out of the higher rate tax bracket. It cost £2K in stamp duty, but I am pleased with the result, and am thinking about putting in a fourth property that has a 70% mortgage on it, so that full relief on the mortgage payments is allowed. I can now take a dividend from the company that that keeps me just inches below the tax threshold.

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