How should landlords with multiple properties deal with the tax issues?

Introduced under former Chancellor George Osborne, the tax and regulatory reforms were part of a shake-up announced in his Autumn Statement 2015 and have hit landlords particularly hard.

The changes came as the government faced pressure to respond to soaring house prices and a rental market that was largely perceived to work in favour of landlords rather than tenants.

Phased in

Among the changes brought in was an additional 3 per cent stamp duty surcharge which was introduced in April 2016. There has also been the phased abolition of mortgage interest rate tax relief for landlords since April 2017, with the final phase still to come in April 2020. 

David Hollingworth, associate director, communications at L&C Mortgages, explains: “From April 2020 landlords will only be able to claim basic rate relief on any mortgage interest costs and will have been having to gradually adjust to what, for many, will have resulted in higher tax bills.”

In most cases, landlords now have to pay stamp duties at a higher rate than individuals buying property to live in personally.--David Hollingworth

The rules around lending were also tightened, with the Prudential Regulation Authority bringing in more stringent affordability testing for those borrowers with buy-to-let ambitions.

Mr Robins says that the main tools being used have been effective in making investment in residential property less profitable for landlords.

“In most cases, landlords now have to pay stamp duties at a higher rate than individuals buying property to live in personally,” he explains. 

“In England, Wales and Northern Ireland, landlords face a 3 per cent supplementary charge, and in Scotland this is 4 per cent.”

Company structure

Mr Robins points to multiple dwellings relief (MDR) as an important relief from higher stamp duty rates and as being helpful for landlords building a property portfolio.

He explains: “Under MDR rules, SDLT (stamp duty land tax) and LTT (land transaction tax) is charged on the average price of all of the properties purchased, using residential tax rates including the supplementary charge. In Scotland, bulk purchases qualify for MDR without suffering the supplementary charge. 

“In England, Wales and Northern Ireland, this means that landlords need to think carefully about whether it is better to pay stamp duty on the average property price at higher tax rates, or on individual prices at lower tax rates. “

Landlords with multiple buy-to-let properties are increasingly turning to the use of limited company structures. 

Data published by Foundation Home Loans in November last year showed 62 per cent of landlords with one to 10 properties would purchase via a limited company, while 65 per cent of those with 11 or more properties would. 

Adam Hosker, founder of Bespoke Finance, says: “Landlords who are building a portfolio in a limited company regularly receive higher mortgage rates than those that do not. 

“Those not jumping at incorporation can often alter the proportionate ownership. A 'tenancy in common' can shift the tax burden from one person to another, the latter typically being the lower rate taxpayer.”
Weighing it up."

Mr Hollingworth says that landlords will be attracted to the idea of using a limited company structure to acquire property, but that independent tax advice will be crucial for them to understand all the possible implications.

“Those that are looking to grow a portfolio and acquire more property in particular are likely to see the benefits of being able to set interest against income within the company and the lower rates of corporation tax,” he adds.

“Those considering moving existing property into a limited company structure will need to factor in that the transaction could incur substantial stamp duty and potential capital gains tax charges, as the transfer essentially sees the property sold to the company.”

But other factors can outweigh this extra cost, according to Mr Robins.

“The main tax factor is the rate at which rental profits are taxed,” he says. “Rental profits of an individual or partnership are taxed at income tax rates of up to 45 per cent, whereas companies pay a flat rate of 19 per cent. 

“For landlords who do not need to draw down all of their rental profits each year, the lower corporate tax rates can make a big difference – for example, making it possible to repay debt much more quickly.”

Some of the additional costs might explain why, as Mark Harris, chief executive of mortgage broker SPF Private Clients, says: “There has been an increase in landlords opting for limited company/corporate structures but the growth hasn’t been the massive switchover envisaged by some market commentators a number of years ago.”

Instead, he notes that some landlords may find it makes sense to purchase new property via a corporate structure while maintaining existing properties as they are.

As Mr Hosker says, the government’s intention was for landlords to cease expanding and “perhaps sell a few units”.

So HM Revenue & Customs is on high alert. Mr Robins highlights a couple of pitfalls for landlords to be aware of.

A property portfolio can create a real problem when its owner dies.--Robins

“For landlords currently operating in partnerships, it may be possible to transfer portfolios into a company at little or no stamp duty cost. This has been seen by some as providing an opportunity to game the system, by trading as a partnership for a short period before incorporating,” he explains. 

“HMRC are well aware of this, and as a result landlords looking to take advantage of incorporation reliefs need to tread carefully – artificial use of a partnership just to save stamp duty is likely to be challenged strongly by HMRC.”

He also points to an issue that, when it comes to the limited company structures, could catch out landlords later in life.

“Property rental businesses are considered to be investments by HM Revenue & Customs, which means that they do not qualify for relief from inheritance tax on death,” he says. “However held, a property portfolio can create a real problem when its owner dies, because a 40 per cent tax liability can arise on assets that can be difficult to sell in a hurry.”