Buy-To-Let: Why Some Landlords Are Setting Up Companies

For those thinking about investing in a buy-to-let property, setting up a company could in certain circumstances be an effective way of limiting the tax bill.

Buy-to-let landlords have already been hit by the additional 3% rate of Stamp Duty Land

Tax (SDLT) on purchases that came into effect in April. The early months of this year saw landlords rushing to buy properties before the SDLT increase took effect.

Landlords are also liable to Capital Gains Tax if they make a gain greater than the current £11,100 allowance. This will mean paying tax at a rate of either 18% or 28%, depending on whether they are a basic or higher rate tax payer. The lower CGT rates of 10% and 20% announced in the March 2016 Budget do not apply to landlords and buy-to-let properties.

Changes From April 2017

There are more changes in the pipeline. Landlords who had been able to claim tax relief worth 40% or 45% will find their relief restricted to 20% once the changes are fully implemented.

Currently, those with buy-to-let mortgages can deduct all finance costs (such as mortgage interest, interest on loans taken out to furnish the property, and fees) in arriving at their rental income. From April 2017 this will no longer apply. They will instead receive a basic rate reduction from their income tax liability for their finance costs. In addition, from April 2017, the 10% wear-and-tear allowance will go, landlords will from then on only be able to deduct actual costs incurred.

Setting Up A Company

Against this background, many landlords are considering whether setting up a company would be advantageous. The main benefit of holding properties within a company is that profits are taxed at 20%. Limited companies aren’t yet affected by the restriction on mortgage interest relief that will take effect next April. Interest is fully deductible against tax.

In the 2015 Autumn Statement, George Osborne announced buy-to-let investors with 15 or more properties in a limited company structure would not be subject to a 3% increase in SDLT. However his spring 2016 Budget confirmed investors buying residential property inside a limited company tax wrapper will pay the 3% SDLT surcharge, closing the loophole that buy-to-let property companies were hoping to avoid.

Companies don’t benefit from the annual allowance for capital gains tax (£11,100 in 2016-17). So it could be more advantageous to hold the property as an individual. In addition, it isn’t easy to transfer personally held properties into a company. Any transfer would usually be considered a disposal for capital gains tax purposes. Landlords might be better off considering retaining existing properties personally, and buying future ones via a company.

Factors To Consider

Running a company does present some advantages, but it also comes with inherent costs, responsibilities and requirements, including the need to file annual returns and accounts.

In general terms, it might be worth setting up a company structure if you are a landlord who owns a portfolio of properties, but might not be worth the trouble for landlords who only own one or two properties.

Everybody’s financial situation is different, and it’s essential to take professional advice.