Buy-to-let landlords shrug off corporation tax increase

Landlords holding properties via company structures are unlikely to change their ownership arrangements despite the chancellor’s move to raise corporation tax, say buy-to-let experts and landlords. 

The tax change from 19 to 25 per cent, announced in the Budget and due to take effect in 2023, will hit rental profits made by limited company landlords with larger portfolios of properties or those generating particularly big profits.

Businesses with annual profits of less than £50,000 will see the tax rate held at 19 per cent, with the rate rising until it reaches 25 per cent for those with profits of more than £250,000. 

Aneisha Beveridge, research director at estate agent Hamptons International, said a typical company landlord would have to own about 10 buy-to-let properties worth £190,000 each, with mortgages at 75 per cent loan-to-value, to earn a profit above £50,000.

“The average company landlord owns around three properties,” she said.

In recent years, property investors have increasingly bought rental homes within a corporate structure, rather than hold their assets as individual buy-to-let landlords. A key attraction has been the ability of limited company owners to take advantage of tax relief on mortgage interest payments, which was gradually withdrawn for personal owners over the four years to 2020.

Calculating the effect of the future corporation tax rise on an incorporated, mortgaged landlord with 10 properties of average value producing average rents, Beveridge found each percentage point rise in corporation tax reduced rental profits by £510. Such a landlord would face a rise in tax due from £9,684 to £12,743 under a move from 19 to 25 per cent corporation tax, she said. 

Incorporation remained advantageous, particularly for higher rate taxpayers, she said. “Even at corporation tax of 25 per cent, you would probably still be paying less tax than you would if you held it in your personal name as a higher-rate taxpayer.” 

Buy-to-let investors, like residential buyers, have taken advantage of the stamp duty holiday that does away with the charge on the first £500,000 of a property purchase. Landlord investors — either as individual or company buyers — took out 22,500 of 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 buy-to-let and second home purchases. 

“There is some anecdotal evidence that buy-to-let house purchases may remain robust even beyond the stamp duty deadline, with landlords expecting a return to ‘normal’ as the vaccine programme rolls out,” UK Finance said.

Some have nonetheless been selling up as the pandemic has seen landlords facing higher liquidity risks on their property assets. 

Matt Jones, a buy-to-let landlord and developer in south London who owns properties both as an individual and in a limited company, said he began to dispose of six of his 22 properties a few months ago, to concentrate on the “develop and sell” side of the business. 

“Covid was an eye opener into the long-term rental property market. We decided it’s quite slow going, there’s lots of admin around it and the returns aren’t that great for long-term investments,” he said.

He made the decision to sell well before the corporation tax rise was mooted but said its impact was likely to be greater on sales than rental profits. “The corporation tax change is not a huge difference but it could make some landlords within limited companies sell before 2023. If it had gone a little higher it could have been a real issue for us.”

John Eastgate, managing director of property finance at mortgage lender Shawbrook, said the average landlord held properties for 10 to 15 years, a term that would leave most with capital appreciation on their homes. “It’s an inconvenience to have to pay a bit more tax, but even at 25 per cent it’s not a particularly penal rate. When you compare it to other asset classes it’s still got quite a lot going for it.”