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More landlords are using corporate structures to invest in property for tax purposes

Contributed by Sussex SEO
May 7, 2019

The changes to mortgage tax relief together with the increasing burden of (over-) regulation have led to a noticeable shake-up of the UK property investment landscape. While the UK's famous "accidental landlords" are becoming fewer by the day, professional (or at least serious) property investors are not only digging in for the long term, but shoring up their defences against HMRC by using corporate structures to invest in property.

From accidental landlords to limited companies

According to research by Precise Mortgages, 44 percent of landlords will set up new buy-to-let purchases through a corporate structure and almost two thirds (64 percent) of "portfolio" landlords (landlords with four or more properties) who plan to buy this year will do so via a limited company. A mere 21 percent of portfolio landlords surveyed intend to buy as individuals.

Flexibility around taxation and ownership

The idea of using limited companies as a means to hold buy-to-let property investments is nothing particularly new, but it did gain a lot of mainstream publicity in the wake of the government's (highly-unpopular) decision to abolish mortgage tax relief, when it became known as the "landlord loophole" and was often described as a way for landlords to swap paying income tax for paying corporation tax. This is actually a bit misleading. For practical purposes, all income is taxable.

There may be some tax-free allowances, but, essentially, if a person or a company has income, the government wants a share of it. From a tax perspective, the advantage of using a limited company is that profits from rental property can be held within the company for as long as the company owner wishes, during which time they will be liable for corporation tax (which is currently lower than the higher rate of income tax). When the person withdraws money from the company, they will then be subject to personal taxation. In other words, higher earners can live off their employment income for now and leave the profits from their property portfolio within a limited company until they retire.

Even after retirement, the limited-company structure could still have value from the point of view of flexibility in estate planning. Instead of having to decide what to do with whole houses, landlords can create shares in their company and bequeath them as they see fit. This might even be a way to reduce a future inheritance tax bill since it would allow for shares to be gifted prior to the original owner's death.

The tradition disadvantage of limited mortgage availability has been offset by regulation

Possibly the main reason why landlords in the UK have tended to prefer to hold property on an individual basis rather than within a limited company is because it was easier to obtain financing since lenders knew that individuals could be pursued to the extent of their personal assets which were potentially much greater than the assets held within the company. These days, however, landlords, and

in particular, portfolio landlords, are subject to a much higher degree of scrutiny when making mortgage applications, which may have helped to make the limited company route seem more attractive.


Tags: United Kingdom | real-estate investment



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