The proportion of landlords intending to take out commercial loans to fund their property purchases has doubled over the past 18 months, as investors look for ways to avoid the forthcoming changes to landlord taxes.
Landlords Taking Out Commercial Loans to Avoid Tax Changes
The study, by the National Landlords Association (NLA), found that the number of landlords who said they planned to use commercial loans has risen from 10% in 2015 – when the tax changes were first announced – to 19% at the end of last year.
The tax changes will be introduced from April this year and will, once fully implemented in 2021, prevent landlords with buy-to-let mortgages from deducting their interest payments and other finance costs from their turnover before declaring their taxable income.
The rise in the proportion of landlords looking to take out commercial loans coincides with a 500% increase in the number of landlords who have formed a limited company over the past year. This has grown from 1% in January 2016 – around 20,000 landlords – to 6% by the end of last year – approximately 120,000 investors.
Landlords who own their properties in a limited company structure will avoid the tax changes and instead pay Corporation Tax, which is currently at 20%, on their profits alone.
The CEO of the NLA, Richard Lambert, comments: “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.”
He continues: “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.”
Are you thinking of taking out a commercial loan for future purchases?