The landlord loophole: Buy-to-let investors are selling their properties to THEMSELVES to get round tax rules
Buy-to-let tax relief is being phased out from 2017, raising landlords’ costs, but the changes only apply if you hold property in your own name so landlords are using limited companies to buy property from themselves. Despite hefty upfront costs, this move means they pay less tax long-term
Rising numbers of Britain’s landlords are selling properties to themselves using a loophole that enables them to avoid paying more tax.
Last year the Government revealed plans to curb buy-to-let, suggesting its rising popularity was leaving aspiring first-time buyers competing with landlords for a limited number of properties on the market.
The former Chancellor of the Exchequer George Osborne said tax relief on buy-to-let mortgages would be capped, starting next year.
The move will make buy-to-let less financially advantageous, and was designed to take some of the heat out of the market.
But it now appears that the policy has prompted landlords to sell their properties back to themselves.
At the moment, a private landlord is entitled to claim tax relief back on their mortgage interest at the rate they pay income tax – 20 per cent for a basic rate taxpayer but up to 45 per cent for a top rate tax payer.
For example, a landlords with an interest-only buy-to-let mortgage paying £1,000 a month can claim up to £450 of it back from the government in tax relief.
Under rules coming in from January next year, this will reduce to just £200 by 2020 – leaving landlords scraping around for an extra £250 a month to cover mortgage costs.
But by selling their properties to a specially set up company, owned by them, landlords can avoid paying tax on these expenses completely.
They can claim the costs of running their buy-to-lets as an ‘allowable expense’ – effectively writing off the cost of mortgage payments, wear and tear and maintenance, letting agents’ fees etc.
Holding buy-to-let property in a limited company means landlords must pay corporation tax on taxable profits at a rate of 20 per cent, but this is due to fall to 18 per cent by 2020.
Mortgage brokers say landlords have been setting up companies for the past 12 months and using them to purchase new properties.
Now, landlords have begun to sell their existing properties to these companies.
Steve Olejnik, of buy-to-let broker Mortgages for Business, said: ‘For many switching borrowing to corporate vehicles will be the solution and we are now seeing buy-to-let purchases account for 63 per cent of all buy-to-let applications. This is a sea change from this time last year when it was only 30 per cent.
‘Despite the costs involved many landlords are also “selling” personally owned property into limited companies because, in the long run, it is more tax efficient. We expect this trend to continue.’
Chris Bramham at specialist finance broker Brightstar Financial said his firm has seen the number of landlords purchasing property through a limited company jump by 40 per cent in the past 12 months.
‘We are definitely seeing more people enquiring for buy-to-let under a limited company, both for remortgages and purchases, 40 per cent higher than it was a year ago so there is evidence that a number of existing buy-to-let landlords have switched to a limited company set up,’ he said.
Should you make the change to a limited company?
While there are obvious tax advantages to switching property ownership into a company, there are also some rather high costs that go with it.
Selling a buy-to-let property and repurchasing it through a limited company triggers a capital gain if the value of the property has risen since its original purchase.
Depending on the rate of income tax paid by a landlord, capital gains tax can be levied at either 18 per cent for a basic rate tax payer and 28 per cent for a higher rate tax payer.
Stamp duty is also payable on the re-purchase by the company – and since April this year all buy-to-let purchases are subject to pay a 3 per cent surcharge on the rate of stamp duty owed.
Changing the ownership of the property from personal to company also means, usually, that the mortgage contract has to be changed. This can in turn trigger early repayment charges to redeem an existing mortgage if the term is not up, a remortgage fee for a new product, legal fees and a valuation fee.
Bramham said: ‘This is not always the right move for everybody. There are benefits to a limited company but there are also costs and more administration. Everybody’s tax situation will be different so there cannot be a one size fits all and it is essential that a landlord seeks advice from an accountant or tax specialist before making the move to limited company.’
Are there advantages other than tax if I make the switch?
Lucy Hodge, of specialist broker Vantage Finance, says her firm has completed several large portfolios for clients recently looking to incorporate.
‘What you often find is that clients take the opportunity either to consolidate a number of individual buy-to-lets into one loan facility, look for a better interest rate or look to include a capital raise at the same time to purchase further investment property,’ she said.
‘It’s important that landlords are seeking good advice from advisers with experience, the right qualifications and professional indemnity cover. They must get the advice in writing and shouldn’t rush into it.
‘The changes to tax relief are being gradually phased in over the next three years so there is no need to panic and rush to make a decision before finding out the facts, they relate specifically to your circumstances.’
Will it have an impact on the cost of my buy-to-let mortgage?
Historically lenders priced buy-to-let mortgages made to individuals more cheaply than limited company rates but the differential is gradually coming down as lenders recognise the growing demand for most complex buy-to-let mortgages.
Indeed John Heron, of buy-to-let lender Paragon Mortgages, said they are working with landlords who have mortgages with the lender to ensure those who want to move their existing holdings into a limited company can – while also leaving their existing mortgage arrangements in place.
He said: ‘This can significantly reduce the hassle and costs and may well preserve the benefit of much lower rates on mortgages that were in place before the financial crisis.
‘Each customer’s circumstances are assessed on an individual basis and we encourage all of our customers, whether they are considering moving their holdings into a limited company structure or not, to seek independent, professional advice from a qualified tax specialist before making any decisions.’
Paul Brett, of specialist buy-to-let lender Foundation Homeloans, warned that in the short-term transferring existing buy-to-lets into a company could be ‘a pricey transaction indeed’.
But he added: ‘If, however, you are looking to hold your buy-to-let for a long time it could still be beneficial to wear the short-term pain for a long-term gain.’
He suggested that for the most part lower rate tax payers won’t benefit from switching their holdings but if you are a professional landlord, you could create a limited liability partnership, hold the property for a year or so and then transfer into a limited liability company, which could be exempt from stamp duty.
How should I go about making the switch to a limited company?
Andrew Montlake, of mortgage broker Coreco, said the landscape for buy-to-let is now much more complex and warned landlords not simply to rely vague suggestions made by unqualified advisers without tax qualifications.
‘There is still a lot of misunderstanding about what this actually means and landlords should first speak to a qualified tax adviser to see if the benefits outweigh the costs in their personal situation as sometimes it is not so clear cut,’ he said.
‘The good news is that more mortgage lenders are now offering such products and as a result competitive pressures means that the rates involved are nowhere near as eye-watering as they were in the past, with some lenders no longer differentiating between rates in a personal name or in a corporate entity.’
Rob Bence, owner of property investment advisers RMP Property, is also a landlord himself and has considered just such a move.
‘Selling your properties into a limited company is a fairly straightforward process as you’re representing both the buyer and the seller in the transaction,’ he said.
‘You will still need a solicitor for your property company, and you will also need one for you personally. However, before selling any properties into a limited company investors should speak to a tax specialist as in most cases the tax implications of moving a property means it is not worthwhile.’
He suggested that because of the amount of tax due, most property investors are leaving their existing portfolios in their personal name but buying any new properties through a limited company.
He added: ‘Before making any drastic changes to your existing portfolio, it’s worth waiting for the Autumn Statement to see if the new Chancellor makes any changes.’