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Purchasing a buy-to-let property through a limited company is now the preferred route for all landlords regardless of portfolio size or type of property, research has shown.

The data, published by Foundation Home Loans yesterday (November 6), showed 62 per cent of landlords with one to 10 properties would purchase via a limited company, almost equal to the 65 per cent of those with 11 or more properties who said the same thing.

Previously landlords with larger portfolios were more likely to purchase properties through a limited company while those with smaller properties typically took out a buy-to-let mortgage in their individual name.

I think it will be the standard way the majority of landlords buy a property in the near future as the knowledge that limited companies are the most tax efficient way is filtering down and will soon become common knowledge

Nick Morrey

Overall almost two thirds (64 per cent) of the 888 landlords polled in September planned to make their next purchase within a limited company vehicle — up from 55 per cent of those asked in June.

The buy-to-let market grew rapidly after the financial crisis but has since taken a beating as a number of tax and regulatory changes have hit landlords’ pockets.

How the rules changed:
An additional 3 per cent stamp duty surcharge, introduced in April 2016, was closely followed by the abolition of mortgage interest tax relief for landlords.

Landlords then took a further hit when a shake up of rules by the Prudential Regulation Authority meant buy-to-let borrowers were now subject to more stringent affordability testing.

The changes to mortgage relief have been phased into the system since April 2017, but by April 2020 landlords will be unable to deduct any of their mortgage expenses from taxable rental income.

Instead, they will receive a tax-credit based on 20 per cent (the current basic tax rate) of their mortgage interest payments.

Following the changes, landlords who were higher or additional-rate taxpayers would now only get refunds at the 20 per cent rate, rather than top rate of paid tax.

On top of this, landlords could also be forced into a higher tax bracket because they would need to declare the income that was used to pay the mortgage on their tax return.

Based on a property yielding £950 in rent and a £600 mortgage per month, the landlord’s income could drop by 57 per cent after the rule changes, from £2,520 to £1,080, as shown in the table:

Tax yearProportion of rental income falling under previous systemProportion of rental income falling under new systemTax billPost-tax and mortgage rental income
Prior to April 2017100%0%£1,680£2,520
2017-1875%25%£2,040£2,160
2018-1950%50%£2,400£1,800
2019-2025%75%£2,760£1,440
From April 20200%100%£3,120£1,080

Due to the tax shake up, limited company status is more attractive to landlords as changes would not affect them and they can offset mortgage interest against profits which are subject to corporation tax instead of income tax rates, which is cheaper.

Interest coverage ratios on limited company applications are also lower than for most individual landlord applications.

Nick Morrey, product technical manager at John Charcol, said the research was “very much” in line with what he saw in the mortgage market at the moment.

He put the latest surge in limited company popularity down to the fact more buyers and advisers were aware of the benefits and that from April this year only 25 per cent of interest qualified for tax credit.

He added: “I think it will be the standard way the majority of landlords buy a property in the near future. The knowledge that limited companies are the most tax efficient way is filtering down and will soon become common knowledge.”

By April 2020, no mortgage interest will qualify for tax credits on the old system.

Jeff Knight, director of marketing at Foundation Home Loans, said: “The rise in limited company usage by landlords shows no sign of tailing off, particularly as we have a more professional landlord community who recognise the benefits of using such a vehicle.

“It’s therefore perhaps no surprise to see a growing number of landlords signalling their intention to make their next purchase through a limited company.”

With a general election set for December 12, the housing market and buy-to-let in particular is likely to be a topic during the campaign.

Last month advisers urged the potential future government to tackle the fact successive pieces of regulation had made it harder for landlords to operate economically.

By Imogen Tew

Source: FT Adviser

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