300,000+ Landlords Move to Limited Companies to Reduce Tax

Over 300,000 landlords have purchased properties in limited companies to reduce tax and tackle rising interest rates. This number has doubled since the introduction of Section 24 in 2017, and with the environment becoming more uncertain, more than 50,000 companies have been set up in the last year alone – with 2022 set to be a record year.

Continue reading to find out why more landlords are using companies – and contact us today for further advice.

The impact of Section 24 and rising mortgage rates

Before Section 24, personal landlords could deduct all mortgage interest and other finance costs (such as mortgage arrangement fees) from their rental income. This meant that they only paid tax on the difference, and made larger profits as a result.

However today, landlords must pay income tax on both their rental income and other income – they then receive a basic rate tax credit (20% maximum of their mortgage interest), and so pay tax on revenue, not profits.

Fixed rates for buy-to-lets have also risen to 5-7% (as at October 2022) over the past year, with rent increases only covering a fifth of the increase in mortgage payments.

With these two factors combined, landlords are facing two options – either sell up their investment property portfolio, or consider how they can boost profits through a limited company structure.

How do landlord limited companies save tax?

Fundamentally, company investors stand a better chance of making a profit. If a landlord buys properties in a limited company rather than their personal name, they’re still able to deduct mortgage interest, which reduces their tax liability.

For example, according to estate agent Hamptons, the average higher rate taxpayer purchasing a buy-to-let could face a £1,716 tax bill on a 6% interest rate – despite making a loss of £2,749. Alternatively, if the property was purchased through a company structure, the landlord would pay £nil tax, limiting their annual loss to £1,604.

In the past, only those with larger portfolios owned buy-to-lets in this structure, but Section 24 has driven smaller investors to do the same, especially with the sharp rise in mortgage rates. In fact, research suggests that around 40% of all new landlord property purchases are now made via a company – up 10% from pre- Section 24 in 2016.

What about existing personal properties?

When a landlord owns an investment property personally, they may wish to transfer that property to a limited company. In this situation, the landlord effectively sells the property to their own limited company; this can cause a number of taxes to apply. If the property has increased in value during the personal ownership, then Capital Gains Tax can apply at up to 28%. Stamp Duty Land Tax (SDLT) may be payable by the company if it provides “consideration” for the property. There may also be mortgages to consider, with the existing personal mortgages having to be replaced with new company mortgages.

Fortunately, with proper advice, some landlords are able to move their personal property business into a limited company without triggering either Capital Gains Tax or SDLT, using Incorporation Relief.

Stamp Duty Land Tax (SDLT) change boosts incorporations

As discussed above, when a landlord transfers properties to a company, they’re effectively selling them, which means stamp duty applies. In September, Kwarteng removed the 5% stamp duty bracket for buy-to-let purchases – with only 3% tax now paid on property values of up to £250,000. The result? Moving over to a limited company will save the average investor nearly £2,000 with the SDLT changes.

Looking for landlord advice?

Are you a landlord looking to set up a limited company for a new purchase or perhaps for existing personal properties? Or are you considering selling your portfolio? If you’re unsure and need to talk through your options, our professional team are here to help – either contact us through our online form, call 01743 562430, or email hello@mercianaccountants.co.uk.

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