The tax relief on commercial mortgage interest payments for buy-to-let landlords is being reduced and, as EveryInvestor.co.uk reported in February 2017, many landlords are turning to commercial loans and incorporation to avoid tax increases.
The tax relief on commercial mortgage payments is being gradually reduced over the next few years to 20%. This means that higher tax payers on a 40% or more tax rate will need to pay more tax.
Currently, the tax relief changes do not affect limited companies or commercial loans. The National Landlords Association (NLA) has said that many landlords have formed limited companies. The Chief Executive of the NLA, Richard Lambert, said:
“Over the last year, more than 100,000 landlords have formed a limited company in order to beat the tax changes.”
Commercial loans are usually used by companies, but many landlords are now using commercial loans to purchase properties as these are not affected by the new tax rules. In 2015 10% of landlords took out commercial loans. This increased to 15% in 2016.
Lambert said that he is aware that the Treasury is concerned that it will lose tax revenue from landlords forming companies and taking out commercial loans, and he believes that it may review this in the Autumn statement. However, there could be an announcement on the Treasury’s intentions as early as this Wednesday’s Budget.
Lambert’s advice for landlords is to postpone forming limited companies until the government’s intentions are clear. They could also wait before looking for commercial mortgage alternatives.