Buy-to-let investors are selling properties to their own company to counteract upcoming tax relief changes, recent reports have revealed.
HM Revenue & Customs (HMRC) announced last year that it would be cutting tax relief on buy-to-let properties amid fears that landlords were dominating the housing market.
The move was designed to make buy-to-let properties less financially advantageous, and remove some prospective landlords from the market.
Buy-to-let investors are currently 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, 40 per cent for higher rate taxpayers, and 45 per cent for additional rate taxpayers.
But under new rules proposed for January next year, the government will introduce a flat 20 per cent rate at which landlords can claim tax relief. For some, this won’t change a thing, but landlords currently claiming back 40 and 45 per cent in tax relief will see a significant drop in their monthly income.
This is why some landlords are selling their buy-to-let property to their own limited company, as no changes have been made the deductibility of mortgage interest within a Limited Company.
Experts say a growing number of landlords have been setting up companies and using them to purchase new properties, as well selling them to an existing one.
Steve Olejnik, of 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.”
Holding buy-to-let property in a limited company incurs corporation tax on taxable profits at a rate of 20 per cent (due to drop to 18 per cent in 2020), and may not always be the best option.
If you are worried about the upcoming tax relief changes and want to discuss the opportunities available to you, please contact RDP Newmans today.