Thousands of landlords are incorporating their property businesses to avoid tax crackdowns announced by the government this year

Figures released at the beginning of December by Kent Reliance show that the lender received its highest recorded level of limited company applications in September. One quarter of applications were from limited companies, representing more than three times the level recorded in September 2014.

Extrapolating its data across the whole market, Kent Reliance estimates that the monthly volume of limited company transactions has broadly doubled in the last year.

Read more: The Kent Reliance Buy to Let Britain report, Edition Three

Landlords are turning to limited companies to limit tax exposure

In July 2015, chancellor George Osborne announced that full income tax relief on buy to let mortgage interest would be gradually withdrawn between 2017 and 2020. In its place will be a 20% tax reduction.

As a result, landlords in the higher and additional rate tax brackets – as well as some in the basic rate bracket – will pay more tax on their rental income. In the very worst cases, landlords could be taxed on a loss, and some could see their profits disappear entirely.

However, limited companies will retain the relief, leading many landlords to consider incorporation as a way to lessen the blow.

New home (PD)

Some limited companies could also avoid the hike in stamp duty for limited companies

In addition, during the November 2015 Autumn Statement, the chancellor announced that buy to let and second home purchases would be subject to a 3 percentage point surcharge, which will come into effect from April 1 2016.

Subject to consultation, corporates and funds that own more than 15 properties will be exempt from this surcharge also (source: Gov.UK – Spending Review and Autumn Statement 2015). This will allow limited companies to potentially save thousands on the purchase of new buy to let properties.

Though it is early to say with certainty, this news could also have contributed to a surge in limited company applications – including from individual seeking to transfer their properties before the April 2016 deadline.

Transferring to a limited company can be costly, however

When an individual transfers his or her business assets to a limited company, the transaction is taxed at open market value.

If a taxable gain occurs upon disposal of the assets, capital gains tax (CGT) will be payable by the individual. Similarly, because the assets in this case are real estate, stamp duty will usually be payable.

Some investors will likely consider the one-off incorporation costs incurred when transferring existing properties worthwhile. Whether this is the case will depend upon the individual investor and his or her future business plans, so landlords should speak to a professional accountant or tax advisor for specific guidance.

Many landlords are choosing to use companies for future purchases only

An alternative to transferring existing assets is for the buyer to make only future purchases through a limited company, whilst retaining their current portfolio in their individual name.

This avoids the CGT and stamp duty that is usually chargeable when incorporating an existing portfolio, and if the landlord wishes to reduce debt on their individually owned properties in order to avoid losing out as a result of the changing mortgage relief rules, they can potentially use the equity from their company-owned properties to do so.

With less than four months to go until the stamp duty surcharge comes into effect, however, it is unlikely that this route will see landlords avoid large stamp duty bills until they hit whatever threshold is deemed sufficient for a corporate exemption. Kent Reliance believes that some landlords might consolidate their properties into joint companies in order to hit the 15 property mark faster.

Using a limited company to purchase properties also comes with additional costs, including accounts, auditing and company registration.

Product availability for limited companies is low, but expected to grow

Another disadvantage to using a special purpose vehicle, at least at present, is the number of buy to let mortgage products available to limited companies. Currently only a very small fraction of products is offered to limited company borrowers, and fees and interest rates for the products that are available tend to be higher.

However, improvement in product availability generally is a good sign that the market is highly responsive to borrower demand. According to the Kent Reliance report, buy to let product choice increased by 41% in the year to October 2015.

With demand for limited company finance growing at the rate it is, we could see product availability improve in the near future – and as a result, product pricing could become more competitive.

Ultimately, all signs point to the continued importance of the private rented sector

Though landlords are confronted with some difficulties at present, the fundamentals that underpin the success of buy to let – robust property price growth and tenant demand – are not set to change in the near future.

Rents have grown by 26.7% in less than a decade, which when considered alongside the growth of the private rented sector to 5.6 million households in the same period, illustrates its importance to the wider UK housing market (source: www.telegraph.co.uk).

It is still possible for property to be a profitable investment, and landlords who remain responsive to changing market conditions will be those most likely to find continuing success.

Written by Ben Gosling at Commercial Trust.

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