Landlords rush to avoid extra tax

Thousands of landlords are setting up companies in a move to allow them to avoid new taxes on rental income, potentially cutting the Treasury’s tax haul by hundreds of millions of pounds, a Telegraph study has found.

Under rules coming into force next week, buy-to-let property investors in the higher rate tax bracket will face new limits on their ability to claim mortgage interest as a cost to offset against their rental income, blowing a hole in some landlords’ financial plans.

But if the investor sets up a company, the bill no longer applies. A study of Companies House and Office for National Statistics data by The Telegraph indicates that more than 4,560 property companies have been incorporated in the past three months alone.

That is a rise of just over 50pc on the level seen in the same period a year ago, and indicates the volume of landlords taking the opportunity to limit the rise in their tax bill. The true number is likely to be higher, as investors have had since the Summer Budget in July 2015 to plan for this change.

What's changing?

Anyone who buys additional residential property, including second homes and buy-to-lets, will have to pay an extra 3 percentage points in stamp duty from April 1, 2016.

The additional charge applies above the current “stamp duty land tax” rates. This means there will be 3pc tax (currently zero) to pay on homes worth up to £125,000, 5pc tax (instead of 2pc) on homes that cost between £125,001 and £250,000, and 8pc (currently 5pc) on homes worth between £250,001 and £925,000.

Homes worth up to £1.5m will be subject to 13pc stamp duty and those over this amount will incur a 15pc charge.

In practice this means that someone buying a £450,000 house will have to pay an extra £13,500 of tax.

Anyone buying a second home has 36 months to sell their original property. They can then get a refund on the extra tax.

In addition, anyone who sold their home before November 2015 but does not currently own their own home has until November 2018 to buy a new one without paying the extra tax.

Corporate investors will also benefit from the falling rate of corporation tax, which is due to be cut to 17pc in the tax year 2020-2021, as well as reduced capital gains tax charges. There are additional costs to setting up a business, however, including administrative expenses and taxes on dividends or salaries when the income is paid out.

In addition, the average mortgage for a company costs 0.8 percentage points more than a loan to an individual, according to brokerage Mortgages for Business.

As a result, Gary Heynes, national head of private clients at tax advice and accounting group RSM UK, believes incorporating only makes sense for investors with more than 10 properties, and a plan to hold those investments for the long term.