The tax loophole landlords are preparing to exploit

Tax Loophole

2017 reforms look set to leave landlords worse off. But, as we edge ever-closer to January, many believe they’ve spotted a tax loophole that could turn the tide back in their favour. Is the second-homeowner party set to continue?

When George Osbourne announced buy-to-let tax relief reforms back in July, his intentions were clear:

Buy-to-lets were to be curtailed. First-time buyers were to be handed an ace. Owning a second home might not be so profitable from 2017.

But when drafting the reforms, the then-chancellor of the exchequer overlooked a crucial detail.

And, as an increasing number of landlords are now discovering, it was a detail that threatens to thwart the treasury’s intentions…

Landlords better off as limited companies

As things stand, landlords can claim tax relief on any mortgage interest they pay.

But from January, tax relief will be capped. Landlords who pay higher rate tax will be left a great deal worse off – some basic rate taxpayers will even take a hit.

But no such legislation applies to limited companies, effectively creating a tax loophole. By selling properties to companies they own, landlords can avoid paying tax on interest payments entirely.

They can avoid tax on property maintenance and letting agency fees, too. In fact, if it’s a reasonable expense, limited companies simply aren’t liable for taxation. And by exploiting the tax loophole, landlords could be better off than under current legislation.

So it’s easy to see why so many landlords are taking advantage. Perhaps the real question is simply: why aren’t there more of them in on the act?

The costs of selling a property to yourself

The answer most likely lies in the potential costs. Depending on circumstance, exploiting the tax loophole could come at considerable expense.

Selling a property that’s increased in value triggers a capital gains tax – a tax that’s more than likely to apply in the majority of cases.

There’s buy-to-let stamp duty; there could be early mortgage repayment charges; legal fees; valuation fees; remortgaging fees; the list goes on.

All of that for a simple tax loophole. Is it really worth it? Just how much might a landlord gain?

Buying through companies jumps 40%

Well, the savviest of landlords have already run the numbers.

And in many cases, they’ve decided exploiting the tax loophole leaves them better off.

Brightstar Financial spokespeople reckon the number of landlords buying property through limited companies has jumped by 40 per cent in the past 12 months.

Mortgages for Business has recently seen buy-to-let applications shoot up 33 percentage points – despite the imminent ‘detrimental’ reform.

So whilst the tax loophole won’t be the way to go for all, we’d recommend landlords begin seeking professional advice.

Given the trend, many landlords clearly believe they have something to gain.

Who’s to say the same sums don’t apply to you too?