Landlords set up as limited companies to beat tax rule

A record one in five UK homes rented out in the first quarter of the year was owned within a corporate structure, after tax changes prompted thousands of landlords to set themselves up as limited companies.

In London, 27 per cent of properties let out in the first three months of 2017 were company-owned. At the start of the tax year on April 6, the government began cutting tax relief for buy-to-let landlords.

“Companies are generally taxed more favourably, particularly with recent changes by government to tax relief, so in many cases landlords can make cash savings by operating through a ­company,” said Johnny Morris, research director at the estate agency group Countrywide, which compiled the data.

Across the UK, the proportion of rented homes owned by a company increased by 6 per cent from a year earlier, the biggest jump on record. The rise came as landlords prepared for cuts to the tax relief they can claim on mortgage payments.

From this month, the amount of income tax relief landlords can claim on mortgage interest payments, and other residential property finance costs, will be reduced over four years from 40 to 20 per cent – the basic income tax rate.

Corporate structures continue to be eligible for relief on mortgage interest but they are subject to corporation tax and must also pay a stamp duty ­surcharge amounting to 3 per cent of a property’s value on all second and ­additional properties. This was ­introduced from April 2016, aiming to hand an advantage to first-time homebuyers.

However, Mr Morris said the ­deterrent effects appeared to have been limited and that landlords were changing strategies rather than holding off on buying investment properties.

“The government’s intention is to put people off in the hope of giving first-time buyers a leg up, but I think many landlords are simply adjusting their behaviour, partly because other investments offer so little in terms of yields at the moment.

“In low-yielding markets, particularly London, we are seeing a bit less investor activity.

“We have also seen more cash purchases and more investors buying cheaper properties that offer higher yields.”

He said the tax changes may eventually deter “more casual investors”, such as people who move from a flat to a house but decide to keep the flat and rent it out.

The size of the UK’s private rented sector more than doubled in the 15 years to 2016, to account for almost one-fifth of all housing, according to researchers at the London School of Economics. These homes are owned by between 1.5m and 2m landlords, the research found.

Over the past two years there has also been a rise in construction of large rented blocks designed for ownership by big institutions, rather than individuals.

Mr Morris said many of these had yet to start operating, meaning they have not yet had a big effect on UK rental ­statistics.
As published in The Financial Times

Words: Vanessa Houlder

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