The proportion of landlords looking to take out commercial loans to fund property purchases has doubled ahead of the forthcoming mortgage tax relief changes in April.
According to the National Landlords Association, the proportion of landlords who said they planned to use commercial loans has risen from 10% in July 2015 – when the changes to taxation were first announced – to 19% at the end of last year.
Mortgage interest relief for residential buy-to-let properties is set to be reduced to the base income tax rate, which is 20%.
It is due to be phased in over a four-year period starting from April. Landlords are currently able to claim tax relief on the top rate of tax of up to 45%.
The changes mean landlords will no longer be able to deduct mortgage interest payments or any other finance-related costs from their turnover before declaring their taxable income.
The rise coincides with a 500% increase in the proportion of landlords who have formed a limited company over the last year. This has risen from 1% in January 2016 – approximately 20,000 landlords – to 6% by the end of 2016 – approximately 120,000 landlords.
Landlords who own their properties as a limited company will avoid the changes to taxation and instead pay Corporation Tax – currently 20% – on their profits alone.
Richard Lambert, chief executive officer at the NLA, said: “Over the last year more than one hundred thousand landlords have formed a limited company in order to beat the tax changes, and this overlaps with an increasing intention to look to commercial loans to fund future purchases.
“While commercial loans are available to non-incorporated landlords they tend to be a source of funding more commonly used by limited companies looking to expand their property portfolios, so we’d expect to see this trend develop as the year plays out.
“However, we know that the Treasury is concerned by the drop in tax revenues as a result of businesses across the economy incorporating to reduce their tax bills, and the Chancellor hinted at a review into the matter during his Autumn Statement last year.
“With this Government’s recent track record in mind, we’d advise any landlords who have yet to incorporate to wait to see whether a consultation is launched in the Budget before making a decision.”
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