Following the implementation of the Stamp Duty surcharge for ‘buy-to-let’ and second home purchases, it was anticipated that the number of buy-to-let purchases would decline.
Whilst the number of investment purchases by individuals has dropped*, we have at the same time seen a considerable rise in buy-to-let purchases by Limited Companies. The reason for this is perhaps not immediately obvious, given the higher product fees and generally less attractive rates that are available with mortgages for Limited Companies.
So, why the sudden change and what are the potential benefits of proceeding with a buy-to-let purchase as a Company as opposed to an individual?
Stamp Duty Land Tax (SDLT) is arguably not a material consideration, in that whilst Company purchases will attract the surcharged rate of SDLT, so would the purchase of an investment property by an individual who already owns a main residence.
The restriction on income tax relief announced in the Summer Budget of 2015, and which was implemented on 6th April 2017, is no doubt a major factor. Individual Landlords had, prior to this date, been able to offset both mortgage interest and other permitted costs from their rental income before calculating their tax liability. From 6th April 2017, the amount that can be offset reduced by 25%, and will do so each year until the relief is scrapped in 2020, at which point all rental income would then need to be declared as income and taxed accordingly. Some Landlords may therefore find that the tax they pay on their rental income may rise to more than 100% of their overall rental profit, (particularly properties with a low yield), and this may also lead to basic rate taxpayers falling into the higher rate tax bracket. Limited Companies are not affected by these changes however, meaning that rental income, along with other permitted expenses, can still be offset in the way that individual Landlords will have become accustomed to.
Whilst the above changes would seem to benefit Company purchasers, there are also other logistical matters to consider when a Company is created, such as the filing of accounts and other financial details of the Company on an annual basis with Companies House.
In addition to Stamp Duty, income tax and corporation tax as referred to briefly above, consideration also needs to be given to any implications with Capital Gains Tax, Inheritance Tax and possibly annual tax on enveloped dwellings.
There is no straightforward way to decide the best way to proceed with a buy-to-let purchase, and it is clear that there are various factors that need to be considered. Whether you are planning a buy-to-let purchase as an individual, a Company, or even if you are still undecided, our team of Property professionals at Blaser Mills are on hand to provide specialist advice.
*The number of landlord purchases involving a mortgage was 5,300 in April 2017. This compared with 10,300 in February 2016 and 11,800 in July 2015, according to figures from the Council of Mortgage Lenders.