A higher number of landlords seek to bypass buy-to-let tax changes

The buy-to-let boom of recent years has fed the stereotype that Brits are obsessed with property. Ever since Margaret Thatcher declared her belief in a ‘property-owning democracy’ and introduced Right to Buy in 1980, the UK was converted into a country that saw houses as something to make money from, not just to live in.

Having long provided mega double-digit returns for investors, investment in buy-to-let has outperformed all major asset classes in recent years. But the government’s decision to introduce a number of measures to curb the growth of private landlords has prompted concern that the buy-to-let windfall may be coming to an end. 

The existing rules that permit landlords to offset all of their mortgage interest against tax will, from this April, be phased out over the next three years until 2020/21.

Once mortgage interest relief has been withdrawn altogether, the consequences of Section 24 will mean that landlords will only be able to claim back a basic tax rate deduction of 20% off their tax bill, which will eat into their rental returns. 

The National Landlord’s Association (NLA) believes that around 440,000 basic-rate tax payers – 22% of approximately 2 million landlords in this country – will move up a tax bracket once planned changes to landlord taxation comes in to force.

To help avoid forthcoming changes to landlord taxation, many investors are now looking to treat their mortgage interest as a business expense by setting up company structures to manage their rental properties, as reflected by a sharp increase in mortgage lending to buy-to-let landlords borrowing via limited companies. 

According to the NLA, the proportion of landlords intending to take out commercial loans to fund their property purchases has almost doubled over the last 18 months, from 10% in July 2015 – when the changes to taxation were first announced – to 19% at the end of last year.

The increase in the proportion of landlords looking to take out commercial loans coincides with a 500% rise in the proportion of landlords who have formed a limited company over the last year. This has increased from 1% in 2016 – approximately 20,000 landlords – to 6% by the end of 2016 – approximately 120,000 landlords.

Landlords who own their properties as a limited company will avoid the changes to taxation and instead pay corporation tax – currently 20% – on their profits alone.

Richard Lambert, chief executive officer at the NLA, said: “Over the last year more than one hundred thousand landlords have formed a limited company in order to beat the tax changes, and this overlaps with an increasing intention to look to commercial loans to fund future purchases.

“While commercial loans are available to non-incorporated landlords they tend to be a source of funding more commonly used by limited companies looking to expand their property portfoilos, so we’d expect to see this trend develop as the year plays out.

“However, we know that the Treasury is concerned by the drop in tax revenues as a result of businesses across the economy incorporating to reduce their tax bills, and the chancellor hinted at a review into the matter during his Autumn Statement last year.

“With this government’s recent track record in mind, we’d advise any landlords who have yet to incorporate to wait to see whether a consultation is launched in the Budget before making a decision.”

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