Purchasing a buy-to-let property through a limited company is now more than twice as popular as buying as an individual, as more landlords are seeking out the most tax efficient methods.
Research from Precise Mortgages showed more than half of landlords (55 per cent) plan to use limited companies to buy properties in the year ahead — more than double the 24 per cent who intend to buy as an individual.
The findings also showed the number of landlords using limited companies to expand their portfolio was on the up, from 44 per cent at the end of 2018 to 53 per cent in the first three months of 2019.
Limited companies were the most popular among landlords with a portfolio of 11 or more properties — as 71 per cent of landlords in this sector used them for purchases — but it was also the dominant choice for those with 10 or fewer properties (51 per cent).
By comparison, only 27 per cent of landlords with 10 or fewer properties chose to buy as an individual.
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 about 57 per cent after the rule changes, from £2,520 to £1,080, as shown in the table:
| Tax year | Proportion of mortgage interest qualifying for 20% tax credit under previous system | Proportion of mortgage interest qualifying for 20% tax credit under new system | Tax bill | Post-tax and mortgage rental income |
| Prior to April 2017 | 100% | 0% | £1,680 | £2,520 |
| 2017-18 | 75% | 25% | £2,040 | £2,160 |
| 2018-19 | 50% | 50% | £2,400 | £1,800 |
| 2019-20 | 25% | 75% | £2,760 | £1,440 |
| From April 2020 | 0% | 100% | £3,120 | £1,080 |
Source: Which.co.uk
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, according to Precise.If landlords who are higher rate taxpayers hold properties directly in their own name, in some circumstances this additional tax can wipe out all profits.John Goodall, chief executive at Landbay
Alan Cleary, managing director of Precise Mortgages, said: “Despite the challenges in the market, professional landlords have still managed to grow their portfolios over the past year with the use of limited companies, and it will continue to be the most preferred purchase route particularly for those with larger portfolios.”
Mr Cleary said the increased use of limited company status was further evidence of how the buy-to-let market was changing and demonstrated how brokers and their clients needed “expert specialist support” when buying as a limited company or considering switching.
Traditional buy-to-let mortgages have also become more popular, according to the research, as nearly seven in ten (69 per cent) landlords now intend to fund their next portfolio purchase with such a policy, compared with 62 per cent at the end of 2018.
David Hollingworth, director at L&C Mortages, said: “With the changes to tax relief on mortgage interest being felt by many landlords that pay higher rate tax, there’s likely to be more considering the use of a limited company as they seek to grow a portfolio.
“Being able to set the cost of mortgage interest against income within the limited company will be the main draw and corporation tax is charged at lower rates.
“Tax advice should be a crucial part of the landlord’s decision to use a limited company and help them understand the practical considerations of setting up and using a company as well as the potential for personal tax when withdrawing income from the company.”
Mr Hollingworth added the growing number of mortgage options for those using limited companies would also help to give landlords more choice to improve the rates on such specialist products.
John Goodall, chief executive at Landbay, said he was seeing a significant increase in landlords who were borrowing within a limited company.
“If a landlord holds their buy-to-let properties within a company structure they will be taxed on profits in the usual way, and the interest they pay will be treated as a cost.”
The market has also seen a number of landlords leave the buy-to-let space due to the changes and in May, as research from Arla Propertymark showed the number of landlords selling their properties had increased by 25 per cent.
The number of new landlords coming to market also took a hit and the number of new buy-to-let purchases dropped 9.1 per cent year-on-year in March.
By Imogen Tew
Source: FT Adviser
