Please Note: This Article is 5 years old. This increases the likelihood that some or all of it's content is now outdated.

According to a recent survey carried out by the National Landlords Association (NLA) 40 per cent of landlords (four in every 10 questioned) say they are seriously considering forming a limited company in which to operate their buy-to-let business and thereby limit their exposure to changes that will restrict mortgage interest relief.

These changes were announced in last year’s Summer Budget and are due to be introduced on a sliding scale over 4 years starting 6th of April 2016.

Certainly, a good proportion of all landlords will be looking into the option in the coming months, according to latest NLA survey[i].

However, the NLA’s research found that so far only one per cent have actually incorporated, which the NLA say can be explained by the high cost of transferring property held personally into a company – when transferring, a property it is effectively sold and bought by the company from the private individual, incurring conveyancing costs as well as stamp duty land tax (SDLT) and possibly capital gains tax (CGT).

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In addition, accounting costs for setting up a company and annual accounting audits and returns must be factored in. Professional setting-up costs are typically around £600 to £1200 with annual accounting costs about the same.

Some landlords may qualify for Incorporation Relief which would allow any capital gains tax (CGT) liability to be transferred and deferred until the property is eventually sold by the company. However, there is no guarantee of this and the landlord may only find out when the tax matters are dealt with at a later date, if it will be allowed or not. Always seek professional advice.

It might be a different matter for a serious landlord intending to build a fairly substantial portfolio starting from now. Forming a new company in which to shelter properties may be a viable option in that situation, but buy-to-let mortgages present some, though not insurmountable complications when companies are involved.

The NLA’s findings also show that three in 10 (31 per cent) of the landlords surveyed had no intention of moving their portfolio to a limited company, and that 29 per cent are still unsure about whether they will incorporate or not.

There are other measures that landlords can take as an alternative to incorporation, such as transferring assets between spouses to maximise tax allowances.

Mortgage interest relief for individual residential landlords will be restricted to the basic rate of income tax (20 per cent) by 2021.

What’s been misleading to most people is that the relief allowed is no longer deducted from rental profit before calculating total income. It means that in most cases taxable income increases, with a danger of pushing landlords into a higher rate tax band. It is only after this calculation that the interest paid on a landlord’s mortgage/s can be applied as a tax credit at the prevailing rate, i.e.; ending at 20% (the current lower rate) after 2020

The Turnover Tax as its being called, because landlords’ tax will be calculated on rental income they earn, rather than their profits, is seen as a way of forcing many basic rate payers into a higher tax bracket, and leaving higher and additional-rate payers with considerably bigger tax bills.

But for landlords structured as companies their tax calculations will be unchanged; they will be able to deduct 100% of their mortgage interest payments from their profits before being subject to corporation tax – currently at 20 per cent, and forecast to be lower. However, they will still be subject to income tax when they draw money out of their company.

Richard Lambert, Chief Executive Officer at the NLA, said:

“Transferring personally held property to a limited company isn’t a straightforward process, so it’s not surprising that so few have taken this action so far.

“Landlords need to do their research but many will realise that incorporating simply doesn’t stack up financially; doing so will incur capital gains and potential stamp duty charges, which means the process may be prohibitively expensive”.

Richard Price, Executive Director of UK Association of Letting Agents (UKALA), said:

“While just one per cent have incorporated so far a significant proportion are still considering the move.

“If landlords follow through with these intentions then it’s likely that more and more will take a hands-on approach to managing their portfolios in the future, which would mean less business to go around for agents, and certainly less of a need for full service offerings.

“The changes to taxation are forcing landlords to re-evaluate their businesses and their place in the market, so our advice for agents is to begin talking to your clients about their intentions over the next few years, and consider how you’ll meet their changing needs in a way that is distinct from your rivals’”.

[i] NLA Quarterly Landlord Panel – Q4 2015 (1364 respondents)

 

Please Note: This Article is 5 years old. This increases the likelihood that some or all of it's content is now outdated.
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5 COMMENTS

  1. The costs of incorporating are vastly overstated here. Rather than £600 to £1200 quoted above, a company can be setup directly with Companies House online for £15.

    • Hi Adrian,

      Yes, you can set-up your own company online, as you say for a small fee.

      However, it\’s not the setting up, its the ongoing accounts and returns that cost – a decent accountant will want at least £600 to do the work involved with this.

      Also, they will advise you to let them set-up the company as they will argue there are certain issues specific to your own operation which they will need to deal with, again another fee.

      I would say that unless you are willing to do a lot of spade work and spend time doing your own work on this, and the annual returns, and perhaps get it wrong, best to use a specialist and pay the fees.

  2. Setting up a Limited Company you need to consider your tax situation. If you only have one property and pay basic tax it would probably not be worth it. I ran a small limited company for ten years and at close of play it was costing about £800 in professional fees, by and large this was offset by tax savings.
    You need to do the calculations multiple lets may make it worth doing.

  3. Can I setup a limited company and sell my properties to the new limited company? Can I have my wife and my 4 children (ages 6 -14) as shareholders with different class of shares? Furthermore I intend to loan the company money to buy my property at market value. Is there anything wrong with that approach? Understand that i would have to pay capital gains upon sell/transfer and the new SDLT. But will the company have to pay higher SDLT as it would be its first purchase?

  4. I am trying to understand the same. Will it be lower sdlt for first property of the company? Also how do you determine the value to sell. My lease on flat is getting smaller so a buyer / my company may not want to pay full market value??

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