Landlords listening to the Chancellor’s Spring Statement will have had a strong sense of déjà vu. The tax changes being rolled out for holiday let owners sounded remarkably similar to those introduced for long-term landlords in 2016. These changes ignited a rush for incorporation among landlords. Analysis of Companies House data shows that of the 353,000 companies that hold buy-to-let homes, 72% were set up since 2016.
The number of companies being set up each month to hold buy-to-let property is running at 4,000-5,000, well up on last year’s previous record. This partly reflects how the vast majority of new purchases are now going into a company structure. However, as interest rates have risen, there has also been a shift among existing landlords moving their properties into a limited company environment.
So are we likely to see a similar shift among holiday let owners? The answer is probably yes, albeit perhaps on a smaller scale. The push to incorporate among will mostly depend on three main factors. Whether the property is mortgaged, whether the owner is a higher-rate taxpayer and how long they’re looking to hold the home.
In similar fashion to longer-term landlords, it’s likely a growing proportion of new holiday let purchases will go into a company as the special holiday let tax regime is wound down. This has eroded the benefits of keeping a property in a personal name. Particularly for higher-rate taxpayers and those with a mortgage. Although, given that holiday let owners tend to be more lightly leveraged than long-term landlords, the benefits of incorporating to continue fully offsetting mortgage interest may be less of a selling point for many. Therefore, the shift to limited companies is likely to be proportionately less and lower in numbers terms too.
Figures from GetGround show that for a higher rate taxpayer, putting a typical mortgaged holiday home into a company from day one instead of holding it in a personal name will likely generate an extra 41% or £4,495 of net income annually* (see underneath the chart below for a full list of assumptions). So in terms of day-to-day running costs, the owner is likely to find themselves materially better off. For existing holiday let owners, the calculation tends to be a bit closer.
The biggest of these costs is stamp duty (including the 3% surcharge), alongside potential remortgage costs (those who lend to companies aren’t always the same people who lend to individuals). Investors may also find that they need to pay Capital gains tax (CGT) which is due at the point of moving the property into a company. Although usually, CGT would have to be paid later when the property is sold on anyway.
But of course, the day-to-day profitability is only half the calculation as it’s important to consider the full lifecycle of the investment. Generally, the benefits of incorporating increase over time. If for example, a holiday let owner is thinking of selling soon, then the costs of incorporating are likely to outweigh the benefits. However, after 10 years, someone paying 40% tax that moves a property into a company rather than continuing to hold it in their own name will find themselves around 10% better off overall - after accounting for costs and expenses for both day-to-day income as well as the final proceeds from the sale of the property.
So it’s likely that a large number of holiday let owners will find themselves approaching a crossroads over the next 12 months and will be in a similar position to many long-term landlords eight years after similar tax changes were first announced. Holiday let investor’s response to these adjustments, which are being implemented relatively quickly, will probably depend on where they are in life and what their long-term plans are.
For lower-rate taxpayers, outright owners and those thinking about an exit within the next seven years, it probably makes less financial sense to move into a limited company structure. Here, the costs of moving the property are more likely to outweigh the financial benefits. But for higher rate taxpayers, anyone with a mortgage or those thinking beyond the next seven years, it's much more likely that a company structure will prove to be the most tax-efficient way forward.
*This is for your information only – you shouldn't view this as legal advice, tax advice, investment advice, or any advice at all. While we've tried to make sure this information is accurate and up to date, things can change, so it shouldn't be viewed as totally comprehensive. GetGround always recommends you seek out independent advice before making any investment decision.
