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Huge Numbers of Buy-to-let Landlords are Incorporating to Save Tax

Tax changes introduced in the private rental sector in 2016 have prompted landlords to look for ways to reduce their tax bills. Incorporating can be one way to do this depending on your personal circumstances. More landlords have moved their buy-to-let properties into limited companies since 2016 than at any time in the last 50 years. In fact, only e-commerce and mail order limited companies were more popular in 2020.

Massive Increase in Landlord-owned Limited Companies

Data from Hamptons International has revealed there were 41,700 landlord companies registered in 2020. This is an increase of 23% on 2019, 34% of them based in London, and there are now 228k landlord companies in the UK.

“Despite growth of the private rented sector slowing in recent years, an increasing proportion of buy-to-let purchases are now being held in limited companies,” says Aneisha Beveridge from Hamptons.

Some Landlords can Save Money by Incorporating

One reason landlords are setting up limited companies is to maximise the amount of mortgage interest they can offset against their tax bill. The government began phasing out mortgage interest tax relief a few years ago for unincorporated landlords. Landlord companies owning buy-to-let properties can offset 100% of their mortgage interest against profits, whereas landlords owning properties in their own name are restricted to just a 20% tax credit with isn’t available to everyone. The ability to offset mortgage interest can potentially save landlords a lot of money, especially if they own a lot of properties with significant mortgages.

How to use companies to reduce property taxes book.

Thinking of using a company to lower your tax bills? This Property Tax Portal guide will show you how to maximise your tax savings using companies.

Incorporating can Benefit Higher-rate Taxpayers

Setting up a limited company to hold property is usually advantageous for landlords with larger portfolios, but it can also benefit higher rate taxpayers. While the standard tax brackets still apply, many company directors can opt to pay themselves a smaller salary from their company so they fall into a lower bracket. The salary can then be topped up with a dividend payment which has a lower tax rate.

The growth of buy-tolet companies has also benefited from the greater numbers of mortgage lenders willing to offer products to limited companies. Pre-2016, there were very few lenders offering specialist products. This meant they were more expensive, landlord-owned companies now have a lot more choice.

Government tax changes were designed to make buy-to-let less attractive to investors, thus ensuring first time buyers could gain a foothold in the market. Many landlords left the sector when renting properties became less economically viable. This has created a shortage in available properties in many areas, and when demand for rental housing exceeds supply, rents increase.

Rents Increasing in all Areas of England

Further data from Hamptons showed that rents increased in all areas of England by 4.1% in December, which is the biggest increase since 2016. Even rents in London rose for the first time in eight months.

“December marked the first time since the onset of the pandemic that prospective tenant numbers surpassed 2019 levels,” says Aneisha Beveridge.

“At the same time, the number of rental homes on the market fell by double-digit percentages in every English region outside London. This has driven rental growth up significantly over the last three months to a point where rents are rising faster than house price growth in almost every region.”

Is Incorporating the Right Decision for you?

Before you rush out and create a limited company for your property portfolio, it’s important to take advice from an expert. Whilst incorporating can make a lot of sense for many landlords, there are tax implications to be aware of, which could wipe out any savings you make. For example, you may get hit with a Capital Gains Tax bill based on the difference between the price you originally paid for the properties and what they are worth at the time of incorporation. The company could also be liable for Stamp Duty Land Tax. Whilst commercial mortgages are now cheaper than they were a few years ago, they are mostly still more expensive than ordinary buy-to-let mortgages.

Consider the pros and cons before incorporating and ask your accountant to do the maths, so you don’t end up with a huge tax bill you can’t afford to pay.

Have you incorporated? If so, was it the right decision, or has it cost you money? Tell us more – you can get in touch via Facebook or Twitter.

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