Changing Tax Landscape for Buy-to-Let Investors

Buy to let investors seeking to keep their tax bills down are increasingly turning towards tax saving schemes as protection from an increasingly severe property tax regime.

Property media is overflowing with recriminations and threats of legal action between the tax advisers who devised and sold the schemes and those who claim that they are tax avoidance and don’t work.

No doubt HMRC and the courts will have the last say, but that doesn’t help the thousands of landlords whose once-profitable businesses are now struggling financially.

But there are three reasons why landlords will not win sympathy for their plight.

First, the government changed the tax policy for buy-to-let to throttle the number of homes switching to rentals in favour of helping ordinary buyers own their homes.

No magic tax pill

Second, before the turn of the century and the invention of the buy-to-let mortgage, most rented homes were held in large portfolios by companies or a few individual landlords. The current market is returning to that strategy.

Lastly, there is no magic tax pill for landlords. Tax rules are enshrined in law, and fancy wording interpretations will not reveal a secret path to a pot of gold. Every taxpayer dances to the same tune, and paying an adviser thousands of pounds offers no advantage.

Everything changed in the 1990s. Investors could borrow relatively cheap money to buy homes for rent. This innovation opened the door to a buy-to-let revolution that, at its peak, encompassed 4.2 million properties.

For a decade, few property investors bothered to hold their homes in a corporate structure because they didn’t need to, as tax rules favoured individual ownership.

Former Tory Chancellor George Osbourne changed this by tinkering with how property business profits were calculated, revamping stamp duty rates and slashing mortgage interest relief for higher and additional rate taxpayers.

The rise of corporate buy to let

Property experts Hamptons have published data that shows only 1-in-8 buy-to-let homes were owned by a company until recently. Still, with a tightening financial noose, 1-in-3 new buy-to-let purchases are within a company.

The study also reveals corporate buy-to-let mortgages accounted for 15 per cent of all property investment loans in 2020, which has risen to 22 per cent today.

“The recent increase in the number of buy-to-let limited companies has come from smaller investors,” says the report.

“ While portfolio investors have long preferred a company structure, recent growth has primarily come from the increased appetite among those with one or two properties. Thirty per cent of company buy-to-let purchases in 2023 were made by companies containing a single property, up from just 14 per cent in 2019. This suggests that companies are increasingly being used by the same individuals who previously held homes in their name despite the costs involved with making the switch.”

What does the future hold for landlords?

No one has a crystal ball, but lenders likely will ease interest rates and fees for setting up corporate loans as companies take a larger slice of buy-to-let ownership.

But the danger is as corporate ownership becomes more mainstream, the government will reassess the difference between personal and corporate property tax rates and act to close the gap.

Whoever wins, the likely result for landlords is a  loss.