Last Updated: Mar 16, 2021

Why Has There Been a Huge Rise in Buy to Let Company Formations?

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A recent rise in the number of buy-to-let company formations being carried out in the UK is believed to be down to tax changes in the buy-to-let sector. The rise in formations has seen a nearly 75% increase since January 2015, as new property investors try to find ways of avoiding paying higher stamp duty charges.

Mortgage statistics from earlier this year have shown an increase in loans being given to companies as banking groups have moved to grant more low cost loans to property companies. It is believed that owning a buy-to-let property through a limited company will look more favourable to banks and financial institutes rather than having the property in your own name.

What brought this about?

The growth in popularity of buy-to-let company formations is thought to be because of the changes announced during the Autumn Budget Statement by George Osborne last November. It was announced that from April 2016, an increase in tax and stamp duty payments would be applied to buy-to-let investors.

The new rules announced at the Spending Review last year will now see new investors seeking to purchase property for buy-to-let purposes being charged an extra 3% stamp duty surcharge. In a double-barrel hit for new property investors, they will also see a cut to their tax relief.

Almost as soon as the new changes were announced last year, the property market has seen a rush in sales from investors in a desperate hurry to buy up property before the changes to the stamp duty rates were applied. Many new landlords have been forming property companies to alter how their rental income would now be seen. Under a company, the rental income would be treated as business income, and as such landlords could take advantage of the lower rates of tax.

For now, buy-to-let landlords can claim tax relief at their marginal rate of tax, currently this is set at 40% for higher rate taxpayers. However, the new tax rate relief will be applied from April 2017, which will see landlords tax relief reduced to the new flat rate of just 20%. Understandably, buy-to-let investors are not too happy about these changes. A property purchased for £100,000 will see an extra £3,000 of stamp duty being added where the property would have been stamp duty free before. With the new cut to tax relief, many landlords will also see their profits fall as a result.

Many buy-to-let landlords have now been looking to set up limited companies as a way to get around the new changes to the tax relief being brought from next April. Purchasing property as a company will mean interest payments can be deducted as a business expense. This does not apply when a property is purchased by a person in their own name.

Landlords will still be liable to pay Corporation Tax for their official company, however this would be charged at 20% rather than the normal income tax rate of 40-45% for higher and additional rates.

Buy to let Property Companies owning 15 or more properties may be able to avoid the stamp duty increase too, but many industry experts expect that the rules may change with regard to this situation at some point in the future.

How can a landlord benefit from forming a Buy to Let Company?

At the moment, a landlord will get more benefit from buying property as a company rather than as an individual because of the existing tax rate relief. Looking a little further ahead in time, savings can also be made by a landlord forming a company as the rate of corporation tax is set to be reduced by a further 2% by 2020, bringing it down to just 18%. Many potential investors are taking advantage of the loophole while it lasts, which is why we have seen such a sharp increase in the number of buy-to-let companies being formed in recent months.

Landlords who are choosing to form their own property company can see the benefits of doing so, but in some cases are unaware of the extra paperwork needed for Companies House, or how to keep up to date with their submissions. This is why choosing Your Company Formations is a good first step for new landlords looking to form their own company. We can advise you of the best package to suit your needs, and we can also offer our help and guidance with all the necessary paperwork that is needed for your annual accounts, Annual Returns, Corporation Tax Returns and company accounts.