Some landlords are also considering whether to switch their investment from residential to mixed use or commercial properties, and as a result we have seen lenders reviewing their limited company mortgage offerings. This surge was to be expected since the Autumn Statement when the Chancellor announced that stamp duty would increase by three per cent in April.
Plugging a tax loophole
Those who own properties through a limited company will still be able to deduct mortgage interest when calculating their profits, and they face twenty per cent corporation tax instead of income tax of up to 45 per cent. In addition, the government hinted that borrowers may be exempt from the tax hike if they hold over 15 properties in their portfolio. Although the Treasury is still consulting on it, the government is expected to close this tax avoidance loophole in the near future.
Potential pitfalls
At first, setting up a limited company may seem like an attractive option but it is more complicated than investors owning a property in their own name. Depending on the value of the properties, landlords transferring houses to a company could have to pay stamp duty and capital gains tax. As well as filing annual accounts and returns, there are also associated costs for legal set up and administration fees. It is therefore imperative to remain cautious as investors could also trigger a large capital gains tax liability on the property if they need to sell it, and it could end up being treated as a disposal by the company.
The lending landscape
Although owning a BTL property through a limited company will start to look like the more standard option, it is possible that the set up costs, the potential for making a loss and having to sell the property as a result, may put off the more amateur landlord.
Although many intermediaries have predicated another rush of mortgage applications through limited companies, it is a real possibility this tax avoidance loophole could be closed by the government in the near future, and the industry must be prepared in the event of this happening.
However, if these recent tax changes make amateur landlords think twice about entering the BTL marketplace and encourage more professional landlords to invest, then the government could cause the market to suffer due to the unintended consequences of their changes.
