In April 2017, new tax rules will come into force, which are designed to dissuade buy-to-let landlords from purchasing more residential properties. New evidence suggests that thousands of landlords have decided to form limited companies, in order to avoid these incoming changes to residential property tax rules. Turner Little comments.
Government measures
Since the introduction of buy-to-let mortgages, the sector has become an increasingly popular investment option. According to the Daily Mail, the number of households renting from private landlords climbed from 9% in 1985 to 22% in October 2015. The rise of generation rent has reduced the UK’s residential property stock, exacerbating the country’s already-dire housing supply crisis.
When he was still Chancellor, George Osborne revealed new tax policies, which are designed to impact buy-to-let landlords. At present, landlords can claim up to 45% tax relief on their buy-to-let mortgage interest payments. From April 2017, this tax relief will be severely restricted, lifting many investors into the higher tax bracket, raising operating costs for the most highly leveraged buy-to-let landlords. He also previously stated that the government will also end the 10% “wear and tear allowance.”
Avoiding tax costs
New evidence from Kent Reliance bank shows how UK landlords are planning to avoid these taxes. Up to 200,000, or 11%, have either put properties into a limited company, or handed them over to lower tax-paying spouses, so they only pay tax on their profits after costs.
Kent Reliance gathered data from industry bodies the Council of Mortgage Lenders and Association of Residential Letting Agents to reach these conclusions. The bank also found that 500,000 (25%) landlords are planning to incorporate going forward. This will mean that they will just pay corporation tax on their profits. This is currently set at 20%, but will drop to 19% in April 2017.
Commenting, Kent Reliance said: “Landlords have reacted to changes to the tax treatment of mortgage interest in two key ways, planning rental increases to cover increased costs and managing their portfolios through limited companies.” Going on, the bank noted: “Making such a move will not be for everyone given the administrative and transactional costs associated. However, given the potential savings on offer for many it is clear there is strong and growing demand to incorporate.”
Forming companies
With this data, Kent Reliance highlights the importance of choosing the right business model. If you want to launch your own firm, you need to look at the advantages and of sole tradership vs. limited companies. Not only can forming a limited company help you negate the impact of tax policies on your profits, especially if you are a buy-to-let landlord, it can also ensure your personal assets are protected.
However, if you plan to incorporate, it is wise to enlist expert aid, to ensure you can launch a successful venture. As a professional company registration agent, Turner Little can provide you with excellent limited company formation services. Our team supplies the complete business solution that you need to fully take advantage of this company creation model, so you can focus on building your firm.
Turner Little
Turner Little was founded in 1998 and it has since become a well-established UK based professional Company Registration Agent, Registered Bank Intermediaries and Business Consultants, as well as Trust provider. You can receive our monthly newsletter by signing up using the form below.
