Putting property into a company won't save landlords from ruin
Email secretlandlord@telegraph.co.uk with your comments and questions.
It's no surprise that buy-to-lets have become the largest single type of business in Britain, outnumbering even the ubiquitous high street staples of hairdressers and fast-food takeaways.
According to research from estate agency Hamptons, there are now over 400,000 companies holding buy-to-let properties – and that figure is set to grow.
Why am I not surprised? Tax.
Three simple little letters make a huge difference to how thousands of landlords now own assets. Where before investors used to personally own their properties – in their own names – the introduction of Section 24, and the limits imposed on mortgage tax relief, meant many landlords ended up paying tax on money they didn't even earn.
In no other business is it not allowed to claim the full expenses for, well, expenses.
But landlords are shrewd beasts, and seeing the Government trying to take their hard-earned assets, they adjusted in accordance with the moved goalposts.
By putting their properties into company structures, landlords could revert back to claiming the full mortgage tax relief.
Of course, a limited company structure is different to owning a property personally, and for many who held a large number of assets over a long period of time, the cost for incorporating was prohibitively high – as it was in my case.
Unfortunately, when trying to sell a personally-owned property to a company – even if that company is just you – not only do you have the capital gains tax to pay on the sale, you also have stamp duty to pay on the purchase. This all makes it a very expensive way of transferring ownership.
And that's before you factor in the costs of redeeming any fixed-rate mortgage deals, the higher rates that banks charge companies, the cost of solicitors and all the rest of the accountancy fees and expenses that go with such an expedition.
It is not a decision to be taken lightly, and for me, it was one that was just so expensive.
Of course, hindsight is great and the fact that interest rates later soared made me question whether transferring my properties would have made me better off.
However, I did make one vital change after the introduction of Section 24: I never bought a property in my personal name again, unless I was going to live in it.
Why did I do that? Tax. Has it been worth it? The jury is still out.
The one thing I can tell you about owning property in a company is there is even more paperwork to deal with – on top of what you already have when managing a buy-to-let – because, well, you're also now dealing with the administration of a company.
There are more rules, too. When operating as a property company, not only do you have the 170-plus rules to abide by for renting out a property, you also have all the company rules and regulations. That means filing annual returns, making up accounts and a huge array of correspondence with accountants that honestly fizzles my brain.
Every year I have to estimate the market value for the properties – I'm unsure why, as I don't get to take any of that paper profit out – and complete a bamboozling array of forms.
In return for all of this paperwork I manage to take tax-free dividends of £500, get to claim the full mortgage interest relief for the properties, and get whacked with an accountant's bill. In addition, any mortgages on the properties are charged at higher rates by the banks despite the fact that they insist I personally underwrite all company loans; insurance costs are higher because it's to a company and not me personally; and everyday banking comes with a service charge.
Of course, there are other perks, such as being able to claim for a Christmas meal out – among other trivial benefits.
Weighing up the pros and cons, I'm now taking the path the Government probably didn't expect me to – I'm selling and paying down the debt on my personally-held portfolio, and waiting for the day when I can escape the clutches of the banks and interest rates once and for all.
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