A growing number of property investors are choosing to acquire buy-to-let homes through corporate vehicles to get around paying an extra 3 per cent above existing stamp duty rates on second homes, mortgage brokers report.
There has been a surge in demand for buy-to-let properties in recent months from investor landlords keen to beat the 1st April deadline for the stamp duty surcharge. But to avoid the hit, it has been reported that a growing number of landlords are setting up company structures to manage their rental properties.
Mortgages for Business report that it has seen the proportion of applications acquiring property within a corporate vehicle surge from 18 per cent to more than 50 per cent in the past six months.
Forming company structures to manage their rental properties will also enable many landlords to continue to deduct mortgage interest from their tax bill as it will be viewed as a business expense. This will allow higher rate taxpayers to more than halve their tax bill because they will pay corporation tax, rather than income tax, which will be 19 per cent from 2017, and will fall to 18 per cent by 2020. Similarly, the ability to take income flexibly in the form of dividends will be more attractive to landlords who might otherwise lose their personal allowance.
David Hollingworth, Director of mortgage broker London & Country, said, “Increasingly, owning a buy-to-let property through a limited company rather than in your own name will start to look like a more standard option to people.”
Of course, incorporation of an existing property letting business may not be practicable in many cases, but it does highlight that there are potential loopholes that may appeal to some shrewd landlords.
Although the stamp duty surcharge is widely expected to disrupt the buy-to-let market, at least in the short-term, the sector will recover, according to Nick Leeming (left), Chairman at Jackson-Stops & Staff.
Attractive rental returns and house price growth means that capital returns are still strong and despite the introduction of the extra tax, Leeming believes that bricks and mortar will continue to be viewed as a safe investment, and that in the end, the losers will be the tenants who have to cover their landlord’s increased tax costs through their rent.
He commented, “When you do the sums, and look at the direction of house prices, placing money in bricks and mortar is still by far the best investment vehicle. If property prices continue on their current trajectory, within a year or less of buying their investment property the vast majority of landlords would have earned back all the money given through stamp duty, even with the new 3 per cent surcharge, by doing nothing at all – just sitting back and watching the price of their home increase. Therefore the idea that the stamp duty tax will act as a deterrent is a fiction, as for most landlords it won’t amount to a significant figure.
“In fact, the only losers will be tenants as landlords are likely to pass on any additional costs they might not want to shoulder to their tenants by increasing rents.”