Since recent tax changes, holding property in a limited company is now advantageous for most landlords. Mortgage Director Vincent Burch explains why.
Buy to let (BTL) via a limited company has always been a tax advantageous way of managing a BTL property for higher-rate taxpayers. However, recent changes in tax rules mean that most landlords are now being pushed into the higher rate tax bracket. As a result, it is a tax advantage for landlords with only a few let properties to manage their BTL via a Limited Company.
I had a conversation with a landlord recently who owns 30 mortgaged properties and he dismissed my concerns of considering a limited company - he thought he was a low rate taxpayer, regardless of the new rules.
If you have a three or more properties, please speak to your accountant, or better still, take tax advice from a property tax adviser. If you earn an income from residential property rental and your accountant has not insisted that you review the matter, you might need to change accountants!
As specified by gov.uk: “The amount of Income Tax relief landlords can get on residential property finance costs will be restricted to the basic rate of tax. The restriction will be phased in gradually from 6 April 2017 and will be fully in place from 6 April 2020.”
This means that by 2020, you will not be able to offset mortgage interest payments - which for most landlords this is undoubtedly their biggest expense. We have landlords who own more than 100+ properties, many of whom are not higher rate taxpayers because as a business they pay tax on the profit. As a business, this profit is calculated by taking into account running costs, property repairs and most importantly the cost of mortgage interest payments.
With an own-name BTL, a client could own three let properties each achieving £750 per month totaling £27,000 rental income, or turnover. The higher rate of tax in 2018 of 40% kicks in at £33,500 and this leaves the client with £6,500 earnings remaining at 20% tax.
If you have little or no outstanding buy to let mortgages, are not the main household income earner, or are retired and only want a few properties; then own name might be best for you. But if circumstances change, for example, the kids grow up and your earnings go up as a result of going back to full-time work, then you could benefit from holding the properties via a limited company. However, be aware there are acquisition costs for transferring these properties from own name into limited company - including stamp duty, additional stamp duty and any CGT.
My colleagues and I predicted some years ago that 2018 would be the main year for buy to let incorporation. In part, this is because landlords have paid their 2017 tax bill in January 2018. For landlords with less than 20 properties who cannot take advantage of the tax reliefs, 2018 is the first year that the January tax has been paid in line with the new tax regulations. In April 2018, the 50% reduction in mortgage interest rates will kick in, exposing even more ‘profit’ to a higher tax unless actions are taken.
In some cases, larger landlords with more than 20 properties can take advantage of Capital Gains Tax Relief by incorporating a business. If this business is run as a partnership, they may be able to take advantage of Stamp Duty relief.
Ideally, most people with property portfolios should have their plan of action in place, to enable them to manage the early repayment charges on their mortgages for when they incorporate, complete transfer of equity or for selling the property.
The buy to let market saw its biggest change in 2017 with a shift towards the professional landlord. There are landlords who are selling up, but most are taking this opportunity to review their current properties and lose the less profitable ones. This creates opportunity - more houses, less landlords, reduces prices and ultimately lends itself to a buyer’s market. Now might just be the time to fall back in love with property lettings.
As the lenders and the Prudential Regulation Authority begin to take into account concerns for the landlord’s future exposure to tax, the rental yield on a single-let unit may not now support the mortgage advance unless a five-year fixed rate is taken - or if the property is in a limited company.
Lenders have become tougher in their distinction of a portfolio landlord. There are more checks to ensure the business is variable, including additional tests to ensure a background portfolio is profitable. Ultimately, we believe an involved market is good for any business person.
Recently, Kent reliance research show that only landlords with more than 10 properties have seen any property growth in the last quarter of 2017 and those with less than 5 properties have not seen any property growth. Additionally, for the first 3 quarters of 2017, Kent have seen 7 out of 10 buy to let applications via Limited Company and this is 45% increase than 2016.
It’s worth remembering the size of the private rental market, 4.7 million privately rented households in the UK with another 1.8 million needed by 2025. Rents started to rise in 2017 and this is expected to continue in the coming years, with the north of England leading the way.
Currently, limited mortgage rates are more expensive - but this is when they’re compared on their own, without taking into account the tax position of rental income. However, I’d predict this won’t be for long. The rates are currently higher for two reasons: First, there is more work on behalf of the bank to assess a client - the complexity of such cases means they are typically individually underwritten. But second, there has been a lack of competition in this market until now.
We have seen more new buy to let lenders lending to limited companies in recent years compared to the actual number of lenders only a couple of years ago. The big mainstream lenders will make the jump into this market when there is the demand and more importantly, when they are not hitting their own lending targets. BMSolutions said early on that they will lend to a limited company and The Mortgage Works are currently trialling via a limited number of brokers. I believe that by the end of 2020, there will be more buy to let mortgages completing via a limited company than in own name.
In recent weeks, lenders have increased interest rates on fixed rates. Generally, rates do tend to increase at the start of the year, as this is when lenders are near their lending targets for the coming financial year end in March. However, there are also external economic factors which affect the control of interest rate, including inflation and low unemployment.
A good indicator we use to predict future interest rate raises is the SWAP rate - this the rate that banks buy fixed-rate money. This week Halifax and Santander have increased fixed rates, due to the increased cost of funds via the SWAP rate increasing 15 points in the last couple of weeks alone. It’s safe to say that the banks have a much better idea of the forthcoming market than most, as they are the ones buying and selling these fixed rates.
Tax advice is just that, advice - and it’s your responsibility if this advice is actioned. There are many unqualified, inexperienced ‘tax advisers’ and I hear all sorts of ideas and proposals from clients. In short, just because something is legal, if the lender will not lend against it and you need a mortgage, then it’s probably not right for you. A mortgage lender might not lend, if they feel something is ‘not in the spirit of tax’. For example, if the lender believes there is a concern HMRC might come after the applicant for tax back payments, as this puts both their solvency at risk and ultimately their risk asset which the loan is securitised against.
Some landlords have changed their business status to a partnership and this may very well allow for tax relief of stamp duty when incorporating. This is the sort of thing we have many lenders agree to lend against. But recently, I’ve heard of a commercial lender being advised by a major blue chip accountancy firm that HMRC is aware of what’s happening and might not offer the tax reliefs that many landlords might be expecting after waiting two years to qualify.
Before you do anything, do your research. Get some advice and make sure you speak with the right people who have experience in property portfolios. At the very least, this should include an experienced buy to let mortgage broker like Vincent Burch Mortgage Services, as well as experienced property tax advisers and experienced conveyancing solicitors.