Landlords Opting for Commercial Loans

The number of landlords hoping to take out commercial loans to fund their property investment has doubled ahead of the changes to mortgage tax relief, set to come into practice in April.

Figures from the National Landlords Association found that 19 per cent of landlords were considering using commercial loans at the end of last year, a figure which has risen dramatically from the 10 per cent recorded in July 2015 when the tax changes were first announced.

Landlords are currently able to claim tax relief on the top rate of tax of up to 45 per cent, however this is set to be reduced to the base income tax rate, which is just 20 per cent. The move is due to be phased in over the next four years, and will come into effect in April this year.

Following the outlined changes, there has been a 500 per cent increase in the proportion of landlords forming a limited company over the past year. The figure has grown from just 1 per cent in January 2016, equating to around just 20,000 landlords, to 6 per cent by the end of 2016, closer to 120,000 landlords. This change is largely due to the fact that landlords who own their properties as a limited company will avoid the taxation changes, instead paying Corporation Tax, currently 20 per cent, on their profits alone.

Chief executive officer at the NLA, Richard Lambert, said: ‘Over the last year more than one hundred thousand landlords have formed a limited company in order to beat the tax changes, and this overlaps with an increasing intention to look to commercial loans to fund future purchases. While commercial loans are available to non-incorporated landlords they tend to be a source of funding more commonly used by limited companies looking to expand their property portfolios, so we’d expect to see this trend develop as the year plays out. However, we know that the Treasury is concerned by the drop in tax revenues as a result of businesses across the economy incorporating to reduce their tax bills, and the Chancellor hinted at a review into the matter during his Autumn Statement last year. With this Government’s recent track record in mind, we’d advise any landlords who have yet to incorporate to wait to see whether a consultation is launched in the Budget before making a decision.’

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