4,545 Ashford Landlords – Is This a Legal Tax Loop-Hole?

Owning Property Within a Limited Company may be More Tax Efficient for BTL Landlords

In November 2015, George Osborne disclosed plans to restrain the buy-to-let (BTL) market, implying that, as a result of the sector’s growing attractiveness first time buyers were having to compete with landlords for the restricted number of properties on the market. One of things brought in was that tax relief on BTL mortgages would be capped, starting April 2017. Before April 2017, a private landlord could claim tax relief from their interest on their BTL mortgage at the rate they paid income tax – (i.e. 20% basic /40% higher rate and 45% additional rate).

So, for example, let’s say we have an Ashford landlord, a high rate tax payer who has a BTL investment where the rent is £900 a month and the mortgage is £600 per month. In the tax year just gone (16/17), assuming no other costs or allowable items …

• Annual rental income £10,800.
• Taxable rental income would be £3600 after tax relief on mortgage interest
• Meaning they would pay £1,440 income tax on the rental income

And assuming no other changes … the landlord would have income tax liabilites (at the time of writing May 2017) in the coming tax years of …

• (17/18) £1,800
• (18/19) £2,160
• (19/20) £2,520
• (20/21) £2,880

Landlords who are higher rate tax payers are going to have be a lot smarter with their BTL investments and ensure they maximise their rental properties full rental capability. However, there is another option for landlords.

Sell (to Yourself)

The Ashford landlords who own the 4,545 rental properties in the town could set up a Limited Company and sell their property to that Limited Company

In fact, looking at the numbers from Companies House – many landlords are doing this. In the UK, there are 93,262 Buy To Let Limited Companies, and since the announcement in November 2015 – the numbers have seen a massive rise.

• Q2 2015 / Q3 2015 – 4,193 Buy to Let Limited Companies Set Up
• Q4 2015 / Q1 2016 – 5,403 Buy to Let Limited Companies Set Up
• Q2 2016 / Q3 2016 – 3,007 Buy to Let Limited Companies Set Up
• Q4 2016 / Q1 2017 – 7,149 Buy to Let Limited Companies Set Up

New Buy to Let Limited Companies

So, by selling their buy to let investments to their own limited company, owned 100% by them, these landlords could then offset the costs of running their BTL’s as an ‘allowable expense’ – effectively writing off the cost of 100% of their mortgage outgoings, wear and tear and upkeep, letting agents’ fees etc.

I am undeniably seeing more Ashford landlords approach me for my thoughts on setting up a BTL limited company, so should you make the change to a limited company?

Long Term Benefits

In fact, I have done some extensive research with companies house in the 15 months (1st January 2016 to 31st March 2017 and 136 Buy To Let Limited Companies have been set up in the TN postcode alone).

If you are looking to hold your BTL investments for a long time it could be very favourable to take the short-term pain of putting your BTL’s in a limited company for a long-term gain. You see, there are huge tax advantages to swapping property ownership into a limited company but there are some costs that go with the privilege.

As the law sees the new Limited Company as a separate entity to yourself, you are legally selling your BTL property to your Limited Company, just like you would be selling it on the open market. Your Limited company would have to pay Stamp Duty on the purchase and if you (as an individual) made a profit from the original purchase price, there could be a capital gains tax liability of 18% to 28%. Existing mortgages might need to be redeemed and renegotiated (with appropriate exit charges).

On a more positive note, what I have seen from incorporating (setting up the Limited Company) is that landlords can roll up all their individual buy to let mortgages into one loan, often meaning they benefit from a lower interest rate and the ability to advance new purchase capital. Finally, if the tax liability is too high to swap to a limited company, some savvy buy to let investors are leaving their existing portfolios in their personal name whilst purchasing any new investment through a limited company? (Just an idea not advice!).

Get Professional Advice

It’s vital that landlords get the very best guidance and information from qualified tax consultants. Whatever you do, always get the tax consultant’s guidance in writing and, as always, do not hurry into making any hasty decisions. The modifications to BTL tax relief are being progressively eased in over the next three years so there is no need to be unnerved and rush into any decisions before finding out the specifics as they relate precisely to your personal situation, because with decent tax planning (from a tax consultant) and good rental / BTL portfolio management (which I can help you with) … whatever you do – keep on the right side of the line!

For more information on the Ashford property market, visit the Ashford Property News Blog

Taylors Residential Lettings Limited, Company no. 6002742, Regd Office: Suite 1, Invicta Business Centre, Monument Way, Ashford TN24 0HB