For a limited company, buy-to-let stamp duty has become one of the biggest incentives that dictate how they will continue to trade as a landlord.
There have been huge changes in the regulations covering the buy-to-let market. The most immediate has been on those landlords that are individuals. Buy-to-let landlords usually trade either as a limited company or as an individual.
Together with changes in the tax structures surrounding mortgage interest and the Prudential Regulation Authority’s new rules surrounding lending, buy-to-let landlords must also consider the implications surrounding stamp duty and how they are affected.
Change Has Been Swift
Usually, changes in tax and other fiscal regulations are introduced slowly over several years. Changes in successive governments has meant that each has applied their policy to do everything possible to cover the deficit. Consequently, there have been quite a few rapid changes in regulations governing, tax, lending and ancillary factors such as stamp duty.
Landlords that have comfortably been running their businesses as sole traders are now faced with the stark reality of higher overheads, that could not have been anticipated a few years ago. One of the big changes is the liability for stamp duty.
Individual Landlords and Stamp Duty
In April 2016, stamp duty for private individuals increased by 3% across the board whether they were parents co-signing to help a child onto the property ladder, a second home buyer, or someone buying to let.
So, the increase jumped from zero percent, two percent, five percent, ten percent and twelve percent to three percent, five percent, eight percent, thirteen percent and fifteen percent respectively, on buy-to-let properties and second homes.
On paper, this may not seem to be very much, but the higher the value of the property, the steeper the bill becomes. Consider a landlord that already owns property buys a new property for £260,000.
At three percent of the first £125,000, they would pay £3750. On 5% of the following £125,000 they would pay £6250, and on eight percent of the remaining £10,000, they would pay £800. Compared to the previous stamp duty costs, they would be paying over three times more.
Ltd Company Buy-to-Let Stamp Duty
Ltd company buy-to-let stamp duty has not been exempted from this change. This means that, regardless of the legal structure of the buy-to-let business, all landlords will continue to incur this cost when purchasing new properties for their buy-to-let portfolio.
Established individual landlords may face a dilemma when counting the cost of the changes. If they already have a large portfolio, transferring their properties to a limited company could have substantial capital gains tax and, of course, the new stamp duty scales.
Furthermore, there have been indications that limited companies will become liable for the higher rate of stamp duty on the first property purchased, meaning that individual landlords at least enjoy relief on their first property.
Thinking Out Of The Box
Several scenarios arise from the combination of all these changes. Apart from having to consider the likelihood of further changes in the near future such as the first property being included in the higher rate stamp duty scales, conversion to a limited company to enjoy the tax benefits may not necessarily be the most prudent move to make.
Thinking out of the box, however, some landlords may choose to retain all their current properties as an individual and set up a limited company or an SPV – Special Purchase Vehicle – to at least enjoy the tax benefits of future investments.
The types of properties that the landlord invests in will also be affected by changes. Mobile homes, caravans, and boathouses will not be affected by the changes. This would mean that unless the landlord has a very specific niche in these areas of property, there is no avoiding the stamp duty liability. That is, of course, unless the landlord has a first property valued at below £40,000.
When considering how stamp duty will affect you as a landlord, it is a good idea to take into consideration all the factors that influence how you operate. If you are starting up as a new landlord then setting up a limited company will almost certainly be the best route to take.
You will be affected as a limited company in the same way that an individual landlord is, however, the tax implications on both mortgage interest and corporate tax may well mitigate the expense of stamp duty.
Get Expert Advice
It is best to speak to an expert who can take all your circumstances into consideration, including the size of your current portfolio. If you are a new landlord you will need specialist advice as you will also experience the stricter lending regulations that come into force from October 2017.