Brokers know that the end of January signals one of the main concerns for their clients – the submission of the much loved self-assessment tax return.

What’s more, in the 2020/21 tax year, landlords will no longer be able to claim mortgage interest tax relief as a deduction from rental income as of 6 April 2020. Instead, landlords will receive a tax-credit, based on 20 per cent of their mortgage interest payments. For higher rate tax payers this could see tax bills rise and potentially place them into a higher tax bracket.

The changes have been well documented in recent years, yet for landlords it’s still been a major adjustment. Since April 2017, when the tax relief on mortgage interest began to be gradually phased out, the market began to see the number of limited companies increasing. Analysis of our mortgage data shows that in the first quarter of 2019, 72 per cent of buy-to-let mortgage applications were made through a limited company. This is because using a limited company means that landlords aren’t impacted by the changes to the private landlord’s mortgage tax allowance and would be able to continue deducting mortgage expenses from rental income. By ensuring that their profit margins aren’t affected, landlords can reinvest back into their properties or add to their portfolio.

Using a limited company isn‘t a new concept for landlords, nor is it something where the market should expect to see a slowdown. Recent landlord research found that one in seven landlords currently use a limited company to manage all their properties. Moreover, 63 per cent of landlords said that they intended to purchase their next buy to let property within a limited company structure; a figure which has risen from 55 per cent in the second quarter of 2019.

As a limited company, landlords will be expected to pay business mortgage rates rather than private landlord rates, which are traditionally more expensive. In some instances, having to pay business mortgage rates could cost more than a landlord would save in higher rate tax relief, so it’s important to ensure your clients consult with the right professionals before making a decision.

When transferring ownership of a property to a limited company, landlords may also be liable to pay three additional costs: stamp duty following the transfer, capital gains tax and early redemption charges on existing mortgages and re-mortgage costs. This would all vary based on the value of the property and the number of properties the landlord was looking to transfer into a limited company.

So, while becoming a limited company could help landlords to mitigate the private landlord’s mortgage tax allowance changes, their financial situation will become more complex. Therefore, it’s important that clients make an informed decision based on all their financial outcomes including the possible risks, seeking professional advice from those who are qualified to make it.

The industry has been beating this drum for a while now, that it isn’t the role of a broker to give tax advice. A mortgage broker, first and foremost, is there to find the most suitable finance for their client.  Brokers with trusted relationships already in place with specialist lenders that offer limited company products will be at an advantage to support their clients. However, when it comes to specific tax advice and structures, a broker should always be advising their landlord clients to seek independent financial advice from a professional who is suitably qualified.

With more and more landlords considering limited company structures, it’s important for brokers to ensure that they are aware of all the different products available to their clients. They should know which specialist lenders have flexible criteria, have a strong service commitment and are experts in the intermediary market.

Adrian Moloney, sales director, OneSavings Bank