Four in ten landlords are considering becoming a limited company to limit their exposure to tax changes – with implications for letting agents.
However, the National Landlords Association says only 1% of landlords have actually incorporated, and that incorporation does not stack up for most.
Changes that restrict mortgage interest were announced in last year’s Summer Budget.
Mortgage interest relief for individual residential landlords will be restricted to the basic rate of income tax (20%) by 2021.
Landlords will no longer be able to deduct the cost of mortgage interest before declaring their taxable profit, and will instead receive a tax credit of 20% of their mortgage interest costs.
The NLA describes the changes as a Turnover Tax, because landlords’ tax will be chiefly calculated on turnover rather than profits, forcing many basic rate payers into a higher tax bracket.
Landlords structured as companies will be exempt from the changes, instead paying corporation tax (currently 20%) on their profits alone.
But the NLA findings also show three in ten (31%) have no intention of moving their portfolio to a limited company, and that 29% are still unsure about whether they will incorporate or not.
Richard Lambert, chief executive officer at the NLA, said: “Landlords need to do their research but many will realise that incorporating simply doesn’t stack up financially; doing so will incur capital gains and potential Stamp Duty charges, which means the process may be prohibitively expensive.”
Richard Price, executive director of the UK Association of Letting Agents (UKALA), said: “While just 1% have incorporated so far, a significant proportion are still considering the move.
“If landlords follow through with these intentions then it’s likely that more and more will take a hands-on approach to managing their portfolios in the future, which would mean less business to go around for agents, and certainly less of a need for full service offerings.
“The changes to taxation are forcing landlords to re-evaluate their businesses and their place in the market, so our advice for agents is to begin talking to your clients about their intentions over the next few years, and consider how you’ll meet their changing needs in a way that is distinct from your rivals.”
Another significant issue for limited companies is of course funding. Funding is generally very much more difficult for a company than for an individual. Setting up a limited company makes more sense at the get go, however very few private landlords will have the appetite and the funding – quite a different proposition.
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The new rules (and there are lots of them) mean that incorporatiing is much more attractive than it used to be. However it is an expensive process (CGT(?) + SDLT + company costs) and is even more expensive to reverse if the government imposes another adverse change.
The new rules on dividends, and mortgage interest relief make incorporation seem very attractive – and for some it will work very well, but before taking the plunge a landlord should consider all the changes and how they will impact on (a) putting a property into the company (b) taking out income from the company and (c) cashing in the lot.
Taxes to consider under each heading include Income Tax (inc tax on dividends), SDLT, CGT, Corporation Tax, Inheritance Tax, and ATED.
This is not a job for the faint hearted. Remember it wont work for everyone.
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