The tax relief cuts for UK landlords has led more investors to acquire properties through incorporated limited companies. In fact, a survey showed that seven out of 10 landlords would use this strategy by 2020.
The survey collected input from nearly 830 buy-to-let landlords with at least four properties. Mortgage-backed-purchases done via a limited company have begun in previous years, although the practice has become more evident recently as more people feel the pinch of the regulatory changes. For instance, all landlords will only be eligible for a 20 percent basic rate relief from their mortgage payments by April 2020.
The New Tax Scheme
Landlords used to claim the effective tax relief at their prevailing tax bracket. The 20 percent rate applies to the basic one, while 40 percent and 45 percent apply to higher and additional-rate payers. Since the government amended the policies, the phased-out cuts for the other two brackets meant that property investors would be incurring more taxes.
On the other hand, corporate tax rates have been on trending downward. The current price is 19, and it will further drop to 17 percent by next year, so it’s unsurprising that many have chosen to establish a limited company to qualify for this tax rate. Whether or not you intend on creating a limited company, it’s likely that you would pass on the added costs to your tenants through rental hikes.
How the Changes Affect Renters
The tax changes only contribute to a fraction of higher rents, as other factors like increased demand and lower supply come into play. As of April, an index showed that renters pay an average £1,218 primarily because of the market in London. You also have to consider the scarce rental growth over the last 12 months, which only reached 0.66 percent in the capital city.
It’s essential for investors to pay more attention to rental yields than attempting to increase their capital. This is where real estate brokers will prove to be useful. Whether you’re looking for letting agents in Canary Wharf in London or estate agents outside the capital, you should consider hiring broker with a broader set of services, mainly for rent collection.
Why The Tax Changes Are Counter-productive
The government introduced the tax cuts to increase the number of privately owned buy-to-let properties, but the limited-company strategy might be a loophole that it didn’t expect to become famous. Unfortunately, those who own a single property might find it harder to expand their portfolio even if they decide to form a limited company for new purchases.
Stamp duty surcharges await landlords who buy another property. There’s also the issue of Brexit that still causes property investors to remain uncertain about the economy’s future.
While buying properties through a limited company seems like a good strategy, the real benefits will depend on your case. It can be challenging to determine the impact of such a move without consulting a financial adviser, so you should tread carefully before choosing to follow your buy-to-let peers.