Limited Company Buy to Let Mortgages

Is it worth setting up a limited company for your next buy to let property? As a Chartered Building Surveyor, a representative of the National Landlords Association, a consultant for the EU, and as a landlord for over 15 years, it’s no surprise a lot of my customers ask me this question.

While there are pros and cons to the various options for limited company buy to let mortgages, ultimately what matters is the returns you can make. As with most investments, everyone has their own unique circumstances, but I’m going to try and give you the information to at least know what your options are.

Contents

What has changed?

​Personal Buy to Let ownership

Joint Ownership for Buy to Let property

Limited Company Ownership

Drawing an income from a Buy to Let Limited Company

Limited Company interest rates

Can I transfer my Buy to Let to a Limited Company?

Should I buy new Buy to Let properties in a Limited Company?

Conclusion

What has changed?

The “Finance (No. 2) Act 2015; Section 24 – Relief for finance costs related to residential property businesses”… to give it it’s full title, but Section 24 for ease, came into force in April 2017. Not going to lie, it’s a dry read that isn’t particularly user friendly.

The act increases the cost of owning and renting properties, and depending on your own personal tax bracket, may increase the tax you pay.

Before the change, landlords were able to deduct the full cost of their mortgage interest payments from their rent before paying tax on the remaining profits. The new treatment of interest rate relief means you pay tax on profits BEFORE deducting the cost of interest on the mortgage, and then applying ONLY the lower tax rate as relief.

In effect, you will be paying tax on profits you do not make, because you aren’t allowed to include all the costs incurred in your expenses.

This change is the main driver for people considering using a limited company to own their rental portfolios.

Given the complexity of everyone’s tax situation, it’s vital that you discuss any tax strategies with a qualified and experienced accountant.

To give you some guidance, this calculator has been provided by the online property agents uPad to show the difference in tax paid across the various tax years the changes are being implemented.

Personal Buy to Let ownership

This is the most straightforward option for Buy to Let ownership but is the ownership route most likely to be affected by the Section 24 rules.

Those especially impacted are;

  • Landlords with high Loan to Value rental portfolios – i.e. a lot of debt
  • Landlords who are in the higher rate tax bracket
  • Landlords who are close to the higher rate tax threshold, who are pushed into the higher rate by the new changes

If you are a basic rate taxpayer, and the changes do not push you into the higher rate, then you are no worse off than before the changes.

If you are a higher or additional rate taxpayer, then chances are you will pay more tax than you did before the enactment of Section 24.

It is for these groups that using a Limited company may be the better option, however, remember the saying;

“Don’t let the tax tail wag the dog”

So, don’t just look at taxation as the only factor in the decision to invest via a Limited company.

Joint Ownership for Buy to Let property

If you own a property jointly with your spouse or partner, then it may be possible to take advantage of their lower rate tax status. By making a declaration of beneficial interest of joint property on HMRC Form 17, it’s possible to change how the income would be taxed from the default 50/50 split, to the actual ownership ratio – which may be more tax efficient.

For new properties it is possible to buy the property as tenants in common and declare the ownership unequally split. Again, taking advantage of the lower earning partners tax status.

Limited Company Ownership

Another option is to purchase Buy to Let properties as a Limited company. While there are no limits on the number of shareholders and Directors of a company, it is worth knowing that many lenders will have a maximum limit of 4 ‘Applicants’, which relates to both shareholders and Directors.

An advantage of the Limited company route is the reduced tax that is paid – that being 19% Corporation tax (reducing to 17% in 2020/21). As well as this, the fact Limited companies can still offset the cost of mortgage interest against profits, thereby reducing taxable income, increases the tax benefits of a Limited company significantly.

Not only that, but any costs such as legal fees, mortgage broker fees, arrangements fees are all expenses that can be used to reduce the tax payable.

The downside is that there are two levels of taxation to pay. The corporate and the personal.

Joint Ownership for Buy to Let property

If you own a property jointly with your spouse or partner, then it may be possible to take advantage of their lower rate tax status. By making a declaration of beneficial interest of joint property on HMRC Form 17, it’s possible to change how the income would be taxed from the default 50/50 split, to the actual ownership ratio – which may be more tax efficient.

For new properties it is possible to buy the property as tenants in common and declare the ownership unequally split. Again, taking advantage of the lower earning partners tax status.

Limited Company Interest rates

Something else to think about when deciding how to structure the purchase of your next property is how much it will cost to fund the property purchase.

Historically interest rates charged to Limited companies were higher than to individuals, and not all lenders would lend to Limited companies at all. While this has improved in recent years, there is still a slight mark up in both interest rates and fees when it comes to lending to Limited companies as opposed to personal or joint names.

On the plus side, due to the tax benefits of owning rental property in a Limited company, some lenders will lend more to a company than they would an individual. This is usually linked with the Interest Cover Ratio that is used.

You should also consider the costs involved in setting up the company in the first instance, and the costs of filing annual accounts, running a bank account, and the potential need to provide personal guarantees.

Can I transfer my Buy to Let to a limited company?

You can transfer existing properties that you already own into a Limited company, the way to do this is to sell the property to a Limited company. There are some issues you must be aware of that may make this less desirable than at first glance.

  • Capital Gains Tax – if you have owned the property for a while and it has increased in value significantly, there may be capital gains tax to pay on the sale
  • Stamp Duty – as this is a purchase by the company, there will be stamp duty to pay, and it will attract the additional 3% stamp duty rate
  • Purchase costs – broker fees, mortgage arrangement fees, solicitor fees, valuation fees, etc.
  • Mortgage Interest – the interest rate charged by lenders for personal buy to let and Limited company buy to let can vary. While some lenders now do not charge differently, the majority still charge a slight premium when lending to a company
  • Reporting – as a Limited company you will be required to submit accounts to Companies House and other taxes may apply, including Corporation tax, PAYE, NI and dividend tax.   

Even if there is a saving to be had from transferring from a personal to Limited company structure, the costs involved in doing it may not make sense. It may take years to recoup the costs, and this may be outside of your investment timeline.

Should I buy new Buy to Let properties in a Limited Company?

For higher and additional rate taxpayers, it will generally be sensible to buy any new Buy to Let properties through a Limited company (but still, check this with your accountant).

For basic rate taxpayers, it may be worth using a Limited company if you plan on building up a sizeable portfolio and eventually becoming a higher rate taxpayer.

The mortgage interest rates used to be significantly more expensive for Limited companies, however due to the increased interest from the market, the costs have narrowed. It is now possible to get very similar, if not identical, interest rates for personal and limited company Buy to Lets.

One is that lenders still show some difference is in the product fees. These tend to be slightly higher for Limited company mortgages, however the cost difference between the two is often covered by the tax saving relatively quickly.

Conclusion

There is no definite answer as to whether to buy property for rent as an individual, jointly, or as a Limited company. It very much depends on your own tax status, your plans, and the number of properties you have already.

This is a highly specialised area and one that crosses the boundaries between mortgage adviser, tax adviser and accountant.

As an experienced adviser that has been a landlord for several years, and has properties owned both personally and through a Limited company, I always advise my clients to review both options to see what the impact will be for them.

We can then run the scenarios past your accountants to make sure it is the right decision for you. If you are considering buying a rental property and aren’t sure how is the best way to structure it for you, then an experienced Buy to Let mortgage broker is a great place to start. Someone who can support you with not only the mortgage advice, but also introduce you to suitably qualified accountants and solicitors if required.


Get in touch today to find out more information

8 + 2 =