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Should Buy-to-Let Investors Convert to Limited Companies

By Julian Ramsden, Director | 22 January 2016

2015 was the year of buy-to-let tax changes, with George Osborne announcing a number of measures that will affect investors.

In his Autumn Statement, he changed to stamp duty for additional property purchases. From 1 April 2016, the nil band will fall to £40,000 and rates will increase by 3% thereafter.

In his summer Budget, he included a change to mortgage interest tax relief. From April 2017, he’s replacing tax relief worth 40-45% with a 20% tax reduction.

The Budget also included a change to the wear and tear allowance, with the existing 10% deduction from net rent being replaced with relief covering direct costs.
There are still profitable opportunities for investors

These changes have been widely heralded in the media as a deathblow for buy to let – an assessment we believe is pessimistic (for more on that, read our article on what investors should keep in mind).

One sign of market resilience is an interesting trend – a surge in buy-to-let investors incorporating and purchasing property via limited companies.
A record number of landlords are incorporating

Research from Kent Reliance estimates that the number buy-to-let loans issued to limited companies will be 90% higher in 2016 than it was in 2014. And in September 2015, the lender saw demand for limited company mortgages hit a record high.

A key reason is that limited companies will retain the current, higher level of tax relief on mortgage interest – and some may also avoid the stamp duty increase (although this is still in consultation and would apply only to those that own more than 15 properties).

Whether incorporating is right for you will obviously depend on your circumstances, but here are 2 key considerations:
1. There is a cost to incorporating, and ongoing accounting fees are generally higher
2. You may incur a higher tax liability when you sell property if you transfer existing assets to a company (although you can mitigate this by only making future purchases through the company)

Final note: This is only worth considering if you need a mortgage
The tax advantages of incorporation are primarily based around tax relief on mortgage interest. So if you’re investing in property (like student accommodation) that’s a cash purchase, incorporation is unlikely to be a profitable choice.

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