Landlords are switching to company status ahead of stamp duty hike and the upcoming cuts in buy to let tax reliefs

Annabelle Williams
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Tax is easier for buy-to-let investors registered as companies (Source: Getty)

Landlords are increasingly setting themselves up as companies ahead of upcoming tax changes in the buy-to-let market.

Tax breaks which allow landlords to claim for wear and tear on their properties and deduct mortgage interest from their overall tax bill are to be cut from 2017. It’s because the government wants landlords to be taxed on their income, as private individuals are, rather than their profit after costs, like businesses.

Stamp duty will also rise for anyone who already owns a property – with an additional 3 per cent levied on each rate band from this April.

But the rules only apply to individuals. Increasing numbers of landlords are shifting their tax status by setting themselves up as limited liability partnerships, and then converting into a limited company, according to experts who are seeing increased interest in advice.

Read more: Our guide to the upcoming stamp duty changes

Those with corporate status can offset their expenses against tax, just as all businesses do, and pay corporation tax rates – currently 20 per cent but due to drop to 18 per cent by 2020, says Alistair Hargreaves of mortgage broker John Charcol.

“This way you can defer your tax liability until 60-plus. It’s far easier in terms of estate planning and is a far more effective way of passing on your assets to the next generation,” he adds.

Read more: Don't get burned by the buy-to-let boom

There are benefits, but the process is lengthy. Moving from personal tax status to a limited company can take between 18 months and two years. Depending on how the landlord goes about it, there may be capital gains tax and stamp duty to pay as the properties are technically sold and re-bought by the newly set-up corporation.

The government’s new system of tax on buy-to-let properties forms part of measures aimed at tackling the UK’s housing crisis. Landlords were perceived as having an unfair advantage over householders, being able to deduct ordinary home-owning costs such as wear, tear and mortgage interest payments from their tax bill.

“Buy-to-let was almost a hobby for some people. Everyone was a winner. It was so difficult to lose, that everyone just piled in,” says Hargreaves.

Some will question whether landlords changing to corporation status is in the spirit of the law, but Hargreaves says it is part of professionalising the industry. “It’s moving away from an amateur approach to buy-to-let,” he says.

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