The Buy-To-Let Landlord Loophole

The Buy-To-Let Landlord Loophole
Since George Osborne's announcement that Stamp Duty is set to be increased for landlords buying second homes, the buy-to-let industry has reeled. The industry expects many landlords to accelerate their deals to completion before the new tax surcharge goes live in April.

However, more pragmatic investors have scrutinised the legislation and found their silver lining - corporations are exempt from paying extra. Landlords who are seriously considering further expansions to their property portfolios can look at flipping their properties into a privately owned business, therefore swapping landlord taxes for corporation taxes. The number of mortgages approved for companies has gone up more than 200pc since the Chancellor's first wave of tax relief changes in July 2015.

This isn't a coincidence. The benefits are two-fold. Firstly, you get to avoid the disappointing Stamp Duty surcharge of 3pc on top of your current rate, making purchases cheaper. Secondly, landlords with corporations will be subject to corporation tax, which is set to reduce to 18pc (currently 20pc) by 2020. Meanwhile, landlord taxes will increase to over 100pc of profit for some. Furthermore, and perhaps more importantly, landlords will get increased security against further legislative interference into the property sector in future budgets.

The Chancellor has already made significant changes to property in the past two budgets, there's no reason to believe he won't target it again in 2016. Turning your portfolio into a company may seem a no-brainer, but things aren't as straightforward as that. Landlords will only be exempt from the surcharge if they have a portfolio of more than 15 properties, therefore incentivising only those who have smaller-scale portfolios.

Also, setting up as a corporation isn't easy, there is no guarantee that flipping your portfolio into a business will make you significantly more money, especially given the cost of start-up. Moreover, the Chancellor's recent trend of targeting the sector may result in a focused move to punish property corporations.

Nevertheless, smaller landlords will be enticed - especially if they have the means of going into business with other small landlords. By combining two or three portfolios into one larger one, landlords will mutually benefit from smaller surcharges and also be able to build a foundation for the future - removing themselves from the bracket of 'small' landlord which seem to be the main target in the Chancellor's plans.

The logic behind the move is understandable - get the accidental landlords to sell up, while also giving first-time buyers the initiative to purchase the property; landlords will pay more tax on a property even if they've made an identical offer to a non-landlord! Furthermore, flushing out one section of the landlord demographic will create a more centralised and balanced private rental sector, with substantially fewer players in the buy-to-let game.

The feasibility of buy-to-let was put into question by the Chancellor's budgets this year, but there is no reason to think that the industry is on its knees. There is plenty of leeway for landlords to adapt their portfolios in the immediate and distant future, plus the long-term benefits of buy-to-let are the same as ever.

To find out more about how you can shift your portfolio to your advantage in the coming months and years, please contact your local Martin & Co office today.