How crafty landlords are now using companies to dodge Osborne's buy-to-let tax snatch
01-26-2016
- Applications for company mortgages rockets as tax hikes loom
- Banks boost demand by increasing loans available
- Landlords warned not to rush into companies and beware of implications
- Shifting buy-to-lets to a company may mean CGT and stamp duty bills
By James Burton For The Daily Mail
Crafty buy-to-let landlords are trying to beat a major Government tax grab by investing in properties through companies instead of in their own names.
Under new rules, property investors face an extra 3 per cent stamp duty when they buy — and higher taxes on rental income.
In some cases, all their profits could be swallowed up by the tax hikes. However, experts think it may be possible to avoid the extra charges if the property is bought and owned by a limited company.
As landlords have learned of the ruse, the number of applications for mortgages from businesses has skyrocketed. Companies now account for more than a third of buy-to-let mortgage applications, up from 15 per cent in October, new figures show.
The taxman strikes: Under new rules, property investors face an extra 3 per cent stamp duty when they buy — and higher taxes on rental income
And Money Mail can reveal that banks are responding to the boom by boosting the number of cheap loans for those who apply through registered businesses.
David Hollingworth, director of mortgage broker London & Country, says: ‘Increasingly, owning a buy-to-let property through a limited company rather than in your own name will start to look like a more standard option to people.’
Today, buy-to-let investors who own properties under their own names pay income tax on any profit left after they have paid mortgage interest (although they can also deduct other costs, such as repair work).
For example, say you have a £150,000 mortgage on a £200,000 property. The rental income is £800 a month (£9,600 a year) and the interest on the mortgage is £500 a month (£6,000 a year). Tax would be due on the difference of £3,600.
But in last year’s July Budget, George Osborne announced a plan to scrap the ability to deduct mortgage interest.
By 2020, you will be taxed on the full £9,600 income — minus a 20 per cent tax credit.
It means that the final tax bill would go from £1,440 for a higher-rate taxpayer to £2,640 under the new calculations, according to figures by Deloitte.
The complex changes are a blow to higher-rate taxpayers and could see thousands of landlords’ profits wiped out. Some will even begin to see losses.
To make matters worse, last month, the Chancellor said property investors would face an extra 3 per cent stamp duty, adding £7,500 to the cost of a £250,000 house from April 2016.
Last month the Chancellor said property investors would face an extra 3 per cent stamp duty
However, there is a loophole: those who own properties through a company will still be able to deduct mortgage interest when calculating their profits.
They then face just 20 per cent corporation tax, instead of income tax of up to 45 per cent.
They may also be able to avoid the extra stamp duty, as companies with 15 properties or more are exempt from the tax hike — though the Government is expected to close this loophole.
Lenders are preparing for another rush of mortgage applications through companies.
Aldermore has cut rates on buy-to-let mortgages for limited companies to 4.78 per cent from 5.78 per cent, bringing them in line with rates for individuals.
And insiders say one of Britain’s biggest lenders, BM Solutions, part of Lloyds Banking Group, is launching a range of mortgages aimed at limited companies.
A BM spokesman says: ‘We are mindful of the large amount of change that is happening in the buy-to-let market and we regularly review our policies and products.’
A study by broker Mortgages For Business found that limited company applications for buy-to-let mortgages surged from 15 per cent of all requests in October 2015 to 38 per cent in December.
The number of mortgages on offer to companies also rose in the second half of the year, to an average of 147 — an increase of nearly 50 per cent.
Mark Harris, chief executive of mortgage broker SPF Private Clients, says borrowers should look to smaller lenders for the best deals.
‘Large banks are like sea tankers in terms of changing direction — it can take 12 or 18 months to get something changed,’ he says. ‘Smaller lenders are much more nimble and able to react.’
Owning rental properties through a business was popular until the market hit difficulties in 2010. Although setting up a limited company might seem like an attractive option, it is far more complicated than owning a property in your own name.
Landlords transferring houses to a company could have to pay stamp duty and capital gains tax — depending on the value of the properties — and will need to file annual returns and accounts.
Mr Hollingworth says: ‘There are costs associated with setting up a limited company and that may put off the more amateur landlord.’