Seven years after George Osborne unveiled his game-changing buy-to-let (BTL) tax reforms, evidence shows that they continue to have a huge impact on the lettings sector – with a record 47,000 property company incorporations last year.
The former Chancellor set out to promote a more professionally run rental sector and Companies House data analysed by the letting agent Hamptons shows that, over the last four years, the number of landlords who have transferred their BTL properties into a company has doubled.
Osborne’s Section 24 reforms exempted limited companies but meant that individual landlords could no longer deduct mortgage interest payments from higher rate income tax bills. Claims against tax for administration fees and loans to pay for furniture were also phased out. The result was that landlords continuing to operate on this basis were, in effect, to be taxed on their turnover, rather than profits.
The exemptions for limited companies have led to a surge since 2015 in the number of landlords using this as an option for managing their property portfolios.
Transferring ownership of rental properties has also been seen as an option for some landlords in higher tax brackets. If they have a spouse or partner who pays basic rate tax or no tax at all, transferring properties to them could reduce the amount of tax payable on rental income.
But transferring properties – whether to a partner paying lower tax or into a company – can have repercussions in other areas, in particular for liability for stamp duty land tax and capital gains tax.
So, it is usually advisable to seek advice from a property tax expert before taking any action. Brokers seeking to help their landlord clients can also consult our specialist business development management team, who will provide support and clarity and help them place their cases with greater confidence.
Despite 2021’s record number of property company incorporations, there are signs that the rate of increase is beginning to slow. Last year’s total of more than 47,000 incorporations was still 14% higher than in 2020, which in turn saw a 30% increase over the preceding year. So, while the rate of growth therefore remains strong, signs of a relative slowdown are perhaps not surprising.
Landlords have already had five years to implement changes since the tapered withdrawal of mortgage interest tax relief was introduced in 2017.
Another significant development is that a large chunk of the growth in BTL business incorporations has come from smaller landlords, rather than the larger institutions that made up most rental property owner companies before 2016.
According to Hamptons, only around a fifth of BTL businesses hold more than three mortgaged properties, similar to the profile of landlords who hold property in their own name rather than in a company.
The letting agent estimated that around half of all landlord purchases in 2021 used a company to hold their BTL properties. Around 40 per cent of these new purchases were by companies that were less that a year old. The relatively small size and inexperience of newer companies could imply a need for more guidance and advice, and our BDM team remains ready to provide support – as it does for brokers assisting all types and size of landlord.
London and the South East accounted for 45% of all new incorporations last year, continuing a well-established trend given that higher rents mean that the tax benefits from incorporation are generally larger. Only the North East saw a decline in the number of new BTL companies last year, with a six per cent fall compared to 2020.
Across large swathes of the country, meanwhile, the rental sector is continuing to recover strongly.
In December last year, rents were rising annually at more than seven per cent, around twice the rate of 12 months earlier. In Inner London, annual rents were growing at 8.6% at the end of last year, the highest rate for almost six years. And average rents in Inner London by the end of 2021 were just two per cent lower than before the onset of the pandemic.
So, with both tenant demand and rents rising, now is a good time to consider investing in property.
Paul Brett is managing director, intermediaries at Landbay
Original Article
