Why landlords use companies to beat the buy-to-let squeeze

Landlords are increasingly looking to avoid the squeeze on profits by investing in property through a company structure. Returns have slumped in recent years after a string of changes to the tax regime. Landlords can no longer offset all their mortgage interest payments against tax, and have also seen favourable rules regarding wear and tear removed.

Those using a company structure, particularly higher-rate taxpayers, enjoy a greater number of tax breaks.

Research by Hamptons International, a property firm, showed that during the first half of this year about 12pc of rented homes were let by a company landlord. This was 25pc more than in 2015, before many of these tax changes took effect.

It estimated that 641,480 properties are now owned by companies, a 42pc rise compared with 2015’s figure.

By 2020, investors will only be able to claim mortgage interest relief at the basic rate of 20pc, regardless of their income tax band. By using a company structure instead, landlords will be charged corporation tax on their earnings, rather than income tax at their marginal rate of 20pc, 40pc or 45pc. Corporation tax is currently 19pc and will reduce to 17pc in April.

However, the number of buy-to-let mortgages for companies is limited and investors need to pay themselves dividends to access profits, which can incur a further tax bill – 7.5pc, 32.5pc or 38.1pc depending on the income.

Capital gains tax (CGT) must also be considered. This applies to the amount an asset has risen in value while under

a person’s ownership – the “gain”. While individuals receive a yearly allowance from the taxman, currently £12,000, companies do not.

CGT is often the major issue for landlords looking to transfer their existing properties into a company, as they will generally have to pay this tax at the time of the switch based on the property’s rise in value since purchase.

Stamp duty will also apply, as property will have to be “bought” by the company from the individual, even if the ultimate owner remains the same. For this reason, few landlords transfer their existing properties into a company structure.

Hamptons said the highest proportion of corporate landlords was located in London, where investors typically carried the largest amount of debt.

Landlords are increasingly buying properties using a company to avoid higher taxes