Buy-to-letOct 13 2017

Landlords rush to incorporate despite mis-advice fears

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Landlords rush to incorporate despite mis-advice fears

Limited company borrowing now accounts for nearly four out of every five pounds lent for buy-to-let (BTL) purchases, according to Mortgages for Business.

The broker has revealed limited companies represent 79 per cent by value of its completing buy-to-let mortgage purchase applications – up from 73 per cent in the second quarter.

Taking into account both purchases and remortgages, limited company transactions made up 48 per cent of buy-to-let completions in the third quarter by number of mortgages and 47 per cent by value of lending.

Borrowing via a limited company has surged in popularity following a raft of tax and regulatory changes that have led to spiralling costs for individual landlords.

Limited companies are exempt from the reduction tax relief from 45 per cent to 20 per cent for top-rate taxpayers that is due to be phased in by 2020, and they also enjoy a range of other tax benefits.

But higher interest rates on mortgages available to limited companies have led to claims that unwary investors could see their income cut by £1,000 each year if they choose to incorporate.

It prompted fears among brokers that limited company borrowing could trigger another mis-advising scandal if clients rush into these deals.

Limited companies also face a range of additional costs associated with setting up and running the business, and they do not benefit from a capital gains tax allowance when selling properties.

Steve Olejnik, chief operating officer at Mortgages for Business, said more than 20,000 new special purpose vehicle (SPV) limited companies had been registered with Companies House in the year so far – a trend that could lead to a 35 per cent increase on 2014 by the end of the year.

He said: “Landlords are turning to SPVs because of the benefits they bring in the form of tax efficiencies and softer affordability testing.

"Switching to corporate structures is not without risk, however, and we recommend all our clients take professional tax and finance advice before deciding how to proceed.”

Daniel Bailey, principal at Derbyshire-based Middleton Finance, described limited company borrowing as “very complex for the consumer to understand”.

He said: “What I personally have started doing is trying to build up contacts with tax specialists who specialise in property tax. It is just so important that an individual understands their potential tax liabilities. It is going to differ from person to person.

“I have got clients who will put their first couple of properties in their own name, and then if they are going to grow their portfolio use a limited company.

“Brokers have been recommending that [borrowers] speak to someone in that area. We can give advice on the products, but you need to understand the tax implications.”

simon.allin@ft.com