Landlords urged to be wary of creating a limited company

With the various changes to the tax regime for UK residential landlords, one lettings agency is urging landlords to be wary and calculate carefully before opting for incorporation.

The appeal for creating a limited company to hold a landlord’s property portfolio has been growing in recent months as a means to avoid some of the changes and save the landlord money.

Among the changes are to the wear and tear allowance and from next year, landlords will be restricted on the amount of mortgage relief they can claim.

However, unlike many property professionals and accountants who have been urging landlords to incorporate to save on their tax bill, Benham & Reeves says landlords should be more cautious.
Indeed, a lot depends on a landlord’s personal circumstances as to whether setting up a limited company makes financial sense.

Landlords would need to ‘sell’ their property portfolio

 

The letting agency says that landlords would need to ‘sell’ their property portfolio to the new company which would incur stamp duty land taxes (SDLT).

They say that the savings that can be made on mortgage tax relief will not be enough to mitigate the SDLT’s charge of between 5% and 12% on the property’s value for a long time.

While SDLT may not be payable under some circumstances, most landlords in the UK would have to pay the tax.

In addition, the firm warns, landlords also run the risk of triggering a capital gains tax (CGT) demand if they can’t claim incorporation relief.

Benham & Reeves’ finance director, Vidhur Mehra, said: “We’ve run the figures and in most circumstances, landlords would come out ahead financially. However, each investor is different so each portfolio is different and with different investment timescales, and some landlords are looking at the medium-term while others are looking indefinitely.

“We are saying that incorporation might not suit all landlords since there are hidden costs with incorporation and these need to be considered before taking the step.”

Tenants detail problems with landlords

 

Meanwhile, more than half of tenants living in the South East and London say they’ve had problems with their landlord, according to a survey.

The study was conducted by Tenants Plus which found that dealing with a landlord was the biggest source of worry for tenants – ahead of rent rises and letting agencies – and 4% fear being evicted from their home without notice.

The survey also revealed that 40% of tenants inspected up to five rental properties before finding their home because of fierce competition in the sector.

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