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Why are landlords becoming limited companies?

In the past couple of years there has been an increase in the number of private landlords running their letting business as an incorporated limited company.


One buy-to-let lender reported that in the first three quarters of 2017, seven in ten of its buy-to-let mortgage applications were made via limited companies rather than individuals. For the most part, this shift has been due to an ongoing change in the tax regime for landlords, which is being implemented on a phased basis from April 2017 to April 2020.



Prior to the new tax rules, which were introduced in the 2015 Budget, landlords could effectively claim tax relief on their mortgage interest repayments at their prevailing tax – 20% for basic-rate taxpayers, 40% for higher-rate taxpayers, and 45% for additional-rate taxpayers.


When the new regime is fully in place in 2020, landlords will only be able to claim tax relief for mortgage interest at the basic rate of 20%, potentially increasing tax liabilities for higher- and additional-rate taxpayers by thousands of pounds.


Moving to limited companies


Over the same period, however, corporation tax rates are reducing – from the current rate of 19% to 17% by April 2020. Therefore, it is to the advantage of some landlords to change their letting business to a limited company structure.


While any salary and dividends drawn from the company above the relevant individual allowance will be taxed at the prevailing rate – up to 45% for salary and 38.1% for dividends – any profits retained within the company structure are taxed at the lower corporation tax rate.


The appropriateness of a limited company buy-to-let to each individual is hard to ascertain, as there are many questions here, most of which are best answered by your accountant. However, we have seen a heightened interest in this kind of financing by landlords, which show a growing appetite since the changes were proposed back in 2015.


The impact on tenants


The tax changes have already seen rent increases for some tenants, but this has often depended on whether their individual landlord shifts to a limited company basis or continues trading as an individual.

For many professional landlords with large portfolios and relatively low mortgage exposure – including those who already operated their letting business as a company – there may be no need to increase rents. Those who continue to let as individuals – and especially those with larger mortgages relative to property values – could already be feeling the bite of the changing tax rules, and may have no choice other than to pass that cost onto their tenants in the form of rent hikes.

Changing the type of landlords, not the type of homeownership

The changing tax rules – in addition to other policy changes such as a new stamp duty surcharge on the purchase of second or subsequent properties – are likely to see some single-property landlords driven out of the game altogether.

A recent survey of over 800 landlords by specialist lender Kent Reliance indicated that in the past year landlords with fewer than five properties had not grown their portfolios, while those with ten or more homes had on average added one property.

While the full force of the tax changes won’t hit until April 2020, there’s already an indication it may not be achieving exactly what the government seems to have broadly set out as its aim for buy to let: to shift more properties from the hands of landlords and back into private ownership.

Rather, it may precipitate a shift that will see a reduction in the number of smaller, more amateur landlords, but present expanding opportunities for larger, professional landlords and property investors able to leverage the value in their portfolios while keeping mortgage liabilities to a relative minimum.

Carl Shave is the co-founder of Just Mortgage Brokers.

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  • Tony Gimple

    Landlord Incorporation – Out of the frying pan and into the Fire!

    For the vast majority of landlords, the transfer to a limited company will prove to be a very expensive mistake. Sadly though, their not being told the real position as outlined below.

    The transactional costs

    The value of your time to one side, moving from being a private landlord to a corporate one will incur you in the following costs: -

    • CGT and SDLT if you don’t qualify for S162 Incorporation Relief (you won’t know until it’s too late)
    • Early redemption charges
    • Brokers fees
    • Lenders fees
    • Legal fees
    • Loss cannot be carried forward

    Whilst not in themselves direct transactional costs, being a commercial borrower impacts you in the following ways: -

    • Significantly reduced choice of lenders and higher interest rates; the majority won’t lend to limited companies, and none are keen on BICTs as they fundamentally weaken their ability to pursue the debt.
    • Lenders will mostly require full personal guarantees on a joint & several basis from all the directors and shareholders (if the company goes bust you remain responsible for the debt).
    • Lenders will take a debenture (legal charge) over the company’s balance sheet, which restricts your ability to make best use of your director’s loan account if at all.
    • You’re tied in to the first lender and their appetite for further lending, if any, meaning that each new acquisition or remortgage may need a new lender and a new company if your existing lender isn’t interested.
    • If property prices fall thereby increasing the loan to value beyond the point to which the lender originally agreed, you’ll have to find the cash difference
    • Restrictions on what you can borrow for i.e. remortgage to fund lifestyle.

    The tax position

    Limited Companies and the individuals within them are taxed up to seven different ways: -

    • Corporation Tax (19% falling to 17%, but could be uplifted for ‘property/investment’ companies, as CGT was for individuals)
    • Capital Gains Tax on personal withdraws of capital resulting from selling assets (10%, 18%, 28%)
    • Directors Loan Account Tax (32.5%)
    • Dividend Tax (7.5%, 32.5%, and 38.1%)
    • Income Tax (20%, 40%, 45%, and 60% on the slice between £100,000 and £123,000)
    • Employees and Employers NIC (12% and 13.8% respectively)
    • Inheritance Tax (40% - ‘investment’ companies, i.e. those that hold residential property for 12-months or more for the sole purpose of collecting rents, are fully subject to IHT)


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