I can’t remember the last time there was an official Budget delivered that contained good news for buy-to-let landlords, and this year’s was no exception. The rise in corporation tax from 19% to 25%, initially proposed in last year’s Budget, then scrapped in September’s ‘fiscal event’, was reconfirmed in last month’s Budget and took effect on 6th April. The increase should draw much-needed revenue into the Treasury’s coffers, at the same time reducing post-tax income for a number of landlords holding properties in limited company structures.
Since George Osborne announced the phasing out of tax relief on buy-to-let mortgage interest payments in the Budget of 2015, it feels as though practically every year has brought new conditions making it harder for landlords to run a profitable business. Add in the current challenges posed by a huge rise in the cost of borrowing, and you can forgive buy-to-let borrowers for feeling the pressure.
But there is a silver lining to the corporation tax hike cloud: it is only likely to impact the very largest portfolio landlords. In fact, purchasing property within or switching an existing portfolio to a limited company structure is likely to remain a tax-efficient option for many property investors seeking tax-efficient strategies to galvanise their balance sheets.
Let’s take a closer look at the detail. For many landlords, investing in rental property through a limited company is tax-efficient because they can still offset 100% of their mortgage interest payments against their tax bill – a relief no longer available on personal buy to lets. Rental income is taxed at the corporation tax rate rather than a landlord’s personal tax rate, making incorporation particularly attractive to higher (40%) and top rate (45%) taxpayers.
The increase in corporation tax from 19% to 25% will only hit rental profits made by limited company landlords with larger portfolios of properties or those generating particularly big profits, because it is stepped and tapered. Businesses with annual profits of less than £50,000 will continue to pay 19%, with the rate gradually rising until it reaches 25% for those with profits of more than £250,000.
In recent years, the buy-to-let sector has been professionalising, with a rise in the number of portfolio landlords, who derive most of their income from their buy-to-let investment, and a reduction in the proportion of part-time landlords. While in 2010, 78% of landlords held only one property, by 2020 that proportion had plummeted to 43%, with multiple rental property holdings outstripping single owners for the first time, according to the government’s English Private Landlord (EPL) Survey 2021. But the number of buy-to-let landlords making a profit of more than £50,000 from their portfolio annually is modest, and the proportion of them earning more than £0.25m a year from their property investment portfolios is likely to be vanishingly small.
In fact, the EPL Survey 2021 reveals that 56% of landlords earn less than £20,000 a year in gross rental income; 29% earn between £20,000 and £49,999 and only 15% make more than £50,000 on their rental property portfolio.
So, while this month’s corporation tax change will impact the few, most landlords holding properties via company structures are unlikely to change their ownership arrangements. And most of those considering transferring their existing properties over to a limited company, or buying new investments in a company wrapper, should not be deterred. Mortgage brokers cannot of course advise directly on this area but should refer interested clients to a good tax adviser, who can explain in detail how limited company lets can help them make more from their buy-to-let business in these challenging times.
Jon Hall is group managing director for mortgages and savings at OSB Group
