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New analysis has found that 47,000 new limited companies were established by buy-to-let landlords in the last 12 months.

This represents an increase of 14% on the number of buy-to-let landlord incorporations in 2020 and a five-fold increase on the 9,343 incorporations by buy-to-let landlords in 2013.

Tax changes

Over the past few years, the tax advantages of holding a residential rental property personally have been reduced. Interest on a buy-to-let residential mortgage can only be partially offset against income tax and is limited to the 20% basic rate of income tax. Equally, when a residential buy-to-let is sold, landlords face a rate of capital gains tax of 18% for basic-rate taxpayers and 28% for higher-rate taxpayers. This compares to 10% and 20% rates for most other asset disposals.

Buying an additional rental property also attracts higher stamp taxes, dependent on where in the UK the property is situated.

Market moves

In its research, Hamptons, an estate agent, revealed that approximately 140,000 buy-to-let landlords retired in 2022, with 73% of all landlord transactions involving those retiring from the industry.

As well as facing a less favourable tax environment, landlords face a financial squeeze in relation to higher interest rates, stricter rules governing buy-to-let properties and higher environmental standards.

Landlords can do a number of things to improve their position. Some are raising rents to reflect additional borrowing costs, while some have opted to refinance their portfolios with higher deposits, so they may access lower interest rates.

Despite these measures, the squeeze on profits is clear.

Tax planning

For landlords facing reduced profits, now is a good time to make sure their business is as tax efficient as it can be. One option could be to hold future residential buy to let investments in a limited company. Equally, in some instances, it may be beneficial to consider incorporating an existing buy to let portfolio. The decision to hold or purchase property as an individual or as a company is a significant one, and no single strategy or plan can be applied to every situation. A tailored recommendation based on a landlord’s unique circumstances is essential.

For some smaller portfolios, where important tax reliefs may not be available on incorporation, one other option may be to deleverage and reduce the number of properties held. Again, planning should be considered before taking action and it is important to note the compliance obligation to report disposals within 60 days.

Other options

While it may be too early to call time on buy-to-let investing, it is certainly true that many smaller landlords face a more difficult task to make ends meet.

In particular, landlords who have in the past geared their portfolio with high levels of debt and benefited from years of a rising property prices, could now be exposed if prices move downwards. Many will benefit by reviewing their portfolio considering the current economic, regulatory and tax environment. Landlords should also seek professional input where needed.

For individuals who are lucky to have managed to save a nest egg personally, or in a limited company, investing in more liquid assets like shares or bonds, may now be a more attractive alternative. This can be particularly beneficial when done through a tax efficient wrapper like a pension or ISA. Where this is relevant you should consider taking independent financial advice and we can introduce you to TaxAssist Financial Services who can provide independent advice on all aspects of your financial affairs.

Let us handle the burden of your property tax obligations

Our team of friendly and experienced accountants can offer professional and impartial advice on your property tax affairs.

Whether it’s generating and submitting tax returns, calculating or minimising capital gains tax liabilities or deciding to incorporate your buy-to-let operations, we’re here to help.

You may also need to take investment planning advice from an experienced financial adviser. We can introduce you to TaxAssist Financial Services who can provide independent advice on all aspects of your financial affairs.

Contact us today to arrange a free, initial consultation on 0800 0523 555 or drop us a line using our online enquiry form to get the ball rolling.

Date published 2 May 2023 | Last updated 20 Mar 2024

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