When George Osborne announced plans to restrain the buy to let (BTL) market, back in November 2015, his aim was to take the pressure off aspiring first time buyers competing with landlords for the limited number of first time properties on the market. It’s unlikely he expected landlords to open a BTL limited company to get around his measures but it’s happening…
The cap on tax relief on BTL mortgages, which started in April 2017, meant private landlords could no longer claim tax relief from their interest on their BTL mortgage at the rate they paid income tax (i.e. 20% basic /40% higher rate and 45% additional rate). Here’s an example for a Colchester landlord, and high rate tax payer, with a BTL investment. The rent is £900 a month and mortgage at £600 per month. In the previous tax year, ending April 2017, assuming no other costs or allowable items here are the figures:
- £10,800 annual rental income
- Taxable rental income would be £3600 after tax relief from mortgage relief
- £1,440 income tax due on the rental income
Assuming no other changes the landlord would have income tax liabilities (as I write this) over during future tax years as follows:
- (17/18) £1,800
- (18/19) £2,160
- (19/20) £2,520
- (20/21) £2,880
Landlords, who are higher rate tax payers, are going to have be a lot smarter with their BTL investments to ensure they maximise the full rental capability of their their properties…
Colchester landlords who own the 10,975 rental properties in Colchester could set up a Limited Company and sell their property personally to that Limited Company
Whether you believe buy to let is immoral or not, since the announcement in November 2015, there’s been a surge of landlords setting up BTL limited companies. Looking at the numbers from Companies House across the UK there are 93,262 Buy To Let Limited Companies.
- Q2 2015 / Q3 2015 – 4,193 BTL Limited Companies Set Up
- Q4 2015 / Q1 2016 – 5,403 Buy to Let Ltd. Companies Set Up
- Q2 2016 / Q3 2016 – 3,007 Buy-to-Let Ltd companies Set Up
- Q4 2016 / Q1 2017 – 7,149 B2L limited companies Set Up
A landlord selling their buy to let investments to their own limited company, owned 100% by them, can offset the running cost of their BTL’s as an “allowable expense”, effectively writing off the cost of 100% of their mortgage outgoings, wear and tear and upkeep, letting agent’s fees and so on. It’s becoming a popular landlord FAQ and I’m regularly asked for my thoughts on setting up a BTL limited company.
Should You Set Up Your Own BTL Limited Company?
From my Companies House research since 1st January 2016 to 31st March 2017 there were 47 BTL limited companies set up in Colchester postcode areas – so you certainly wouldn’t be alone.
If you plan to hold your BTL investments over the longer term it could be advantageous. In return for the short-term hassle of setting up a BTL limited company you could enjoy longer term gains. Although there may be tax advantages to swapping property ownership into a BTL limited company running a limited company comes with added costs and legal obligations.
In law a limited company is seen as a separate entity to yourself. You are legally selling your BTL property to your BTL limited company, just like you would be selling it on the open market. Your BTL limited company would have to pay stamp duty on the purchase. If you (as an individual) made a profit from the original purchase price, there may also be a capital gains tax liability of 18% to 28%. The mortgage may also need to be redeemed and renegotiated which could incur exit charges.
On the upside landlords “incorporating” (setting up the BTL limited company) can roll up their existing buy to let mortgages into one loan which may attract a lower interest rate and the ability to advance new purchase capital. Finally, if the tax liability is too high to swap your existing properties into a BTL limited company, I am aware some buy to let investors are leaving their existing portfolios in their personal name and purchasing new investments through a BTL limited company.
Get Qualified Advice Before Setting Up A BTL Limited Company!
I am not qualified to offer financial nor tax planning advice. Please consult with a qualified tax consultant with the right qualifications, experience and insurance before you do anything. Make sure any advice and opinions from tax consultants are put into writing. Because the changes to BTL tax relief are being progressively phased in over the next three years there’s plenty of time to assess the impact on your personal financial and tax affairs. With qualified tax advice, to ensure you remain on the right side of the law, I can certainly help you put together and manage a rental/BTL portfolio, give a ring on 01206 862288 in office hours, or email firstname.lastname@example.org. I’d love to hear your thoughts about any aspect of the Colchester property market so ask me questions or leave your comments below…