Rental landlords ignore corporate tax hike

Owners holding properties through corporate structures are unlikely to change their ownership arrangements despite the Chancellor’s decision to raise corporation tax, experts and owners say.

The tax change from 19% to 25%, announced in the budget and due to come into force in 2023, will affect rental profits made by owners of limited companies with larger portfolios of properties or generating particularly large profits.

Businesses with annual profits of less than £50,000 will see the tax rate maintained at 19%, with the rate rising to 25% for those with profits over £250,000.

Aneisha Beveridge, director of research at estate agent Hamptons International, said a typical business owner should own around 10 buy-to-let properties worth £190,000 each, with mortgages at 75% of the loan-to-value ratio, to make a profit above £50,000.

“The average business owner owns about three properties,” she said.

In recent years, real estate investors have increasingly purchased rental properties within a corporate structure, rather than holding their assets as individual owners buying to let. One of the main draws has been the ability for owners of limited liability companies to take advantage of the tax relief on mortgage interest payments, which was phased out for personal owners in the four years to 2020.

Calculating the effect of the future corporate tax hike on a corporate mortgage owner with 10 average value properties producing average rents, Beveridge found that each one percentage point increase in tax on companies reduced rental profits by £510. Such a homeowner would face an increase in tax due from £9,684 to £12,743 as part of a 19% to 25% corporation tax cut, she said.

Incorporation remained advantageous, especially for higher-rate taxpayers, she said. “Even with a 25% corporation tax, you would likely pay less tax than if you held it in your personal name as a higher rate taxpayer.”

Investors buying to let, like residential buyers, have taken advantage of the stamp duty holiday which removes the charge on the first £500,000 of a property purchase. Owner-investors – as individual or corporate buyers – took out 22,500 new mortgages in the last quarter of 2020, according to the latest figures from industry group UK Finance.

This is the highest level since the first quarter of 2016, when they rushed to beat the introduction of a surcharge on rental purchases and purchases of second homes.

“There is anecdotal evidence that home-to-let purchases may remain robust even past the stamp duty deadline, with landlords expecting a return to ‘normal’ as the vaccination program unfolds. unfolds,” UK Finance said.

Some have nevertheless been sold as the pandemic has seen owners face higher liquidity risks on their real estate assets.

Matt Jones, a South London rental property owner and developer who owns properties both as an individual and as a limited company, said he started selling six of his 22 properties a few months ago , to focus on the “grow and sell” of the business.

“Covid opened our eyes to the long-term rental property market. We decided it was quite slow, there was a lot of administration around and the returns weren’t very good for the long-term investments,” he said.

He made the decision to sell well before the corporate tax hike was mooted, but said its impact would likely be greater on sales than on rental profits. “The corporate tax change isn’t a huge difference, but it could cause some owners within limited companies to sell before 2023. If it had gone a bit higher, it could have been a real problem for us.”

John Eastgate, managing director of property finance at mortgage lender Shawbrook, said the average homeowner held properties for 10 to 15 years, a length of time that would leave the most capital appreciation on their homes. “It’s an inconvenience to have to pay a little more tax, but even at 25%, it’s not a particularly penalizing rate. When you compare it to other asset classes, it still has a lot to offer. »