Buy to let investors dashing to beat tax rise

29th March 2016

More evidence has emerged that buy-to-let investors are dashing to beat tax rises coming their way this April and in the remaining years of this parliament.

According to the latest figures from the Council of Mortgage Lenders, there was a 22 per cent surge in the number of home purchase loans issued to prospective private landlords in January, to 9,500. Moreover the total amount borrowed rocketed 40 per cent to £1.4bn, says The Guardian, reflecting also-increasing purchase prices.

Investment buyers have been flocking to complete their property purchase by the end of this month to avoid the three per cent stamp duty surcharge coming in for second homes at the beginning of April. The policy change was introduced at the Autumn Statement at the end of the November and in the months since, every housing index has noted a huge uptick in buy-to-let activity.

But the stamp duty change is not the only hit coming down the road for landlords. From April 2017, new rules will be phased in that will remove the right to claim tax relief on mortgage interest, which will be replaced with a flat-rate payout that halves the tax break offered to higher-rate taxpayers.

More landlords that nominally pay basic-rate taxes now could fall into a higher tax bracket.

It has been reported that, as a result, there was an increase in the number of people setting up limited companies to house property. The Financial Times quotes Steve Olejnik, the sales director at buy-to-let broker Mortgages for Business, saying the proportion of applications from corporate vehicles has surged from 18 per cent to “well over 50 per cent” in the past six months.

The FT said this was related to the hike in stamp duty as it “applies only to homes bought by individuals”. That is not actually true – the increased levy applies to all second home purchases, even those transacted by a company structure – but it is certainly the case that corporate entities will remain able to offset mortgage interest against their tax bill as a business expense.

Of course, investors need to consider if setting up a company structure would also add costs, for example, through typically higher mortgage rates applicable to businesses buying property. And if you’re thinking of moving an existing portfolio into a new holding company, it would have to “buy” the properties and that could incur a hefty capital gains tax bill.

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