How to mitigate higher taxes on buy to let

In January this year, the former Conservative shadow chief secretary to the Treasury, Lord Flight, condemned the government for the changes to taxation. He called on minister to rethink the proposals - particularly the 3 per cent stamp duty hike - claiming: “This will hit more modest buy-to-let investors the most.

“Politically the government may lose more votes over this issue than it realises, as there are many thousand buy-to-let investors living in marginal constituencies.”

Meanwhile, a petition was launched by a coalition of small landlords, called ‘Reverse the Planned Tax Relief Restriction on Individual Landlords’, which accumulated 60,892 signatures.

It called for the government to reconsider the wear and tear changes, claiming that “this is preventing us from offsetting costs in the same manner as other sole traders”.

However, predictions of a slowdown in the sector as a result of the changes have so far proved unfounded, with the latest figures from Connells showing the number of valuations for buy-to-let purposes had grown by 51 per cent between January 2015 and January 2016, while the remortgaging sector soared by 97 per cent over the same 12-month period.

John Phillips, group operations director of SpicerHaart and Just Mortgages, said: “Some people said the tax change would prompt a slowdown in the sector but for the moment this is not happening.”

Holding property in this way means that a landlord will pay corporation tax instead of income tax Christine Newell

Both sectors experienced steadier performances on a monthly basis, with the number of valuations carried out for buy-to-let investors in January climbing 11 per cent on the previous month.

While this may be a last-ditch attempt to invest in residential property before the changes kick in is yet to be seen; data will not be available on this until at least May 2016.

However, what has been happening is more small buy-to-let investors seeking advice on constructing a special purpose vehicle (SPV), so they can buy property through a limited company in order to avoid the impending stamp duty surcharge.

John Heron, managing partner of Paragon Mortgages, suggests doing this “as soon as possible while these changed have a phasing-in period of four years”.

According to Bob Young, chief executive of Fleet Mortgages, there is not a lot someone can do to mitigate the full effect of taxation. “I hate to say this, but it is what it is. Like some lenders, we’re being approached by landlords thinking of moving the properties they own into a limited company.”

He agreed that if the properties are within a limited company then they will not see the cuts that individuals are going to experience between 2017 and 2020, when they will be systemically brought down from the higher to the basic rate.

However, Mr Young added: “The individual needs to be aware of the potential for capital gains tax and stamp duty implications. For example, such a move would be treated as a sale between personal and corporate entities, even if the owners of the property are the owners of the company.”

Another way of offsetting the tax bill, according to Paul Clampin, chief lending officer for Landbay, is to reduce the amount of debt or remortgage to a lower rate to cut interest payments.

He noted that rising rental inflation could also help offset the tax implications. “Due to the strong growth prospects for the private rented sector (PRS), rental inflation is likely to be another mitigating factor. While supply continues to outstrip demand for accommodation in the UK, the PRS will flourish.”