For decades, buying a property has been seen as a great investment option. However, recent changes in the buy-to-let market have had a knock-on effect on private landlords’ confidence in terms of whether they should continue building their portfolios.

The stamp duty hike which kicked in last year has now been joined by major changes to the taxation. However, despite the obvious transformation that promises to raise costs, private landlords can address both issues with a single solution – by setting up a limited company.

Stamp duty

Last year, stamp duty surcharge came into force. It applies to all properties bought as second homes or buy-to-let investments from April 2016 onwards.  This includes when clients plan to rent out their current home and buy another to live in, rather than selling. The additional 3% charge in stamp duty is now payable on top of the standard rate for the particular property. In the past, landlords and buyers of second properties didn’t have to pay stamp duty on properties worth up to £125,000, however, the rules have changed and the 3% surcharge now applies to these properties below the threshold as well.

With a residential purchase where the buyer is not selling their current home simultaneously, they have three years to sell their old property to be eligible for reclaim stamp duty. The only other way of avoiding the stamp duty surcharge is by purchasing a commercial property or holiday let.

Changes to taxation

April 2017 marked the start of the changes to taxation for residential landlords. From now on, the amount of income tax relief landlords can get on residential property is restricted to basic rates. The new regime will be phased in over the next four years and the percentage of payable tax will gradually increase until 2020.

Before the changes kicked in, property owners were able to offset the cost of their mortgage interest against the profit that they receive from the rental income and pay tax on the profit only. Going forward, the tax will be calculated on the gross rental income.

The amount of the gross income generated on the property is added to each individual’s total income figure and may mean that some private property owners will be pushed into higher rate tax bracket due to the change. It is most likely to affect landlords that have a portfolio of properties or are already very close to higher rate tax bracket. In some instances this will mean that the amount of tax a landlord pays exceeds the profit they make.

The above scenario can be avoided if the property is purchased through a limited company. For landlords wishing to avoid the added expense on their existing property portfolio, it is possible to re-mortgage these into their limited company. Key Mortgage Advice works with lenders willing to allow landlords sell their portfolio to newly formed limited companies.

Sharon Duckworth, director at Key Mortgage Advice

Key Mortgage Advice was first established in 2001 and helps clients find the right mortgage for their needs and circumstances; whether that’s getting on the first rung of the property ladder, building a buy-to-let portfolio or buying their workplace.

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