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The ‘Tenant Tax’ has led to a massive increase in the number of buy-to-let companies. As landlords seek to protect their bottom line by incorporating their property portfolio, we look at what effect that is having on the rental market and on tenants.
The state of play
Section 24 is well established now. It started phasing in from April 2017 and came into full force in April 2020. Landlords can no longer claim mortgage interest against their tax bill. If you rent out a property, your income is taxed on earnings, not profit
Now all you can claim back is 20% of the mortgage interest.
Back at the start of the change, those in the know suggested some ways to avoid the tax bombshell, one of which was to set up a limited company. In a post-Section 24 world, a higher rate taxpayer would be paying 40% on their rental earnings. Corporation tax, they pointed out, is only 19%.
And 29% of landlords agreed, and the rental market is seeing a huge swing in that direction.
No problem, then. Well, no. There is a problem.
The liability of limited liability
It might provide some relief compared to doing nothing, but for a lot of landlords the buy-to-let company can’t protect them from all that much.
Whether or not landlords take refuge in a limited liability company, renters take a hit after the following extra costs bite.
Corporation tax is currently 19%. As of 2023, it’s going to be 25% on profits over £50,000 p.a. If a landlord wants to pay themselves out of what remains, they’ll need to take it either as dividends or as salary. After the £2,000 allowance, dividend tax at the basic rate is 7.5%.
Then more costs take their turn.
Lenders generally charge limited companies more to borrow a buy-to-let mortgage. The higher interest rates mean higher rents.
The limited liability company pays stamp duty on residential properties valued over £40,000. Depending on the value of the property, it could be anywhere from 3% to 15%. Those extra hits mean higher rents.
The additional obligations of a limited company are plenty. The paperwork required includes articles of association, accounting records, corporation tax returns, and if you take a salary, you’ll need to set up PAYE for tax and national insurance. All that may well require the input of an accountant. That’s an extra cost, which means, yes, higher rents.
Who was it all for?
The idea of section 24 was to rein in the buy-to-let market by incentivising the sale of property portfolios. The theory was that with fewer properties held by landlords, there’d be more opportunity for renters to step on to the property ladder.
Reality is often disappointing.
The fact is, a lot of people want or need to rent. If landlords sell their property, as many are inclined to do now, there will be fewer rental properties, and inevitably that means rental prices go up as supply goes down.
For the landlords who stick at it, incorporation is increasingly the path to take. The number of buy-to-let companies incorporated in the UK last year was 47,400, which was 14% up on 2020. Half of 2021’s buy-to-let mortgages went to buy-to-let companies.
But the lesser of two evils remains an evil. The hostile tax environment that punishes landlords also hurts tenants. Landlords can mitigate the effects, but there’s no escaping them. If you’re hoping to navigate the rental market, take a word of advice from those who know the local market and the national rental climate.
Our years of experience has given us extraordinary insight into the challenges that landlords face. We’re an independent estate agent with personal and specific advice for each of our clients.
Urban Village are property experts working on behalf of sellers and landlords in south London, providing them with the best deals and the best advice they possibly can. To get in touch and find out the best course of action for your rental portfolio, call us on 020 3519 9121, or email info@urbanvillagehomes.com. To enquire about a buy to let mortgage contact Charlotte Northfield charlotte@northfieldfs.co.uk