Personal or Ltd Company ownership of buy to let property?

What is best for you and why?

Income tax relief on buy to let mortgage interest is being restricted but is it more tax efficient and financially better all round to operate your portfolio using a limited company? Let's compare the options

The tax year 2016/17 was the last year that higher and additional rate income taxpaying landlords could claim full relief on the costs incurred when taking on finance (i.e. a buy to let mortgage).

If you're a residential landlord, you probably know, the main finance cost is the interest you pay on the buy to let mortgage but it may also include interest on loans to buy furnishings and any fees incurred when taking on these mortgages and loans, such as

·      Lender arrangement fees

·      Broker fees

·      Lender’s valuation of the property

·      Legal fees related to the mortgage but possibly not 

to the general conveyancing of the property.

As usual, the information on Gov.uk is typically vague about what is regarded as a finance costs, so please do make sure you take professional advice or ask your tax office for clarification.

In less than a year's time, from 6 April 2020, if you are a residential landlord and you own your rental property personally, you will not be able to deduct the finance costs from your property income when calculating your taxable profit. Instead, you will receive a basic rate reduction on the finance costs from your income tax liability.

Because this is such a game-changer for landlords, the new regime is being phased in over four years on the following basis:

·      Tax year 2017/18: You can deduct 75% of your finance costs from property income. The remaining 25% can be claimed as a basic rate reduction from your income tax liability.

·      Tax year 2018/19: You can deduct 50% of your finance costs from property income. The remaining 50% can be claimed as a basic rate reduction from your income tax liability.

·      Tax year 2019/20: You can deduct 25% of your finance costs from property income. The remaining 75% can be claimed as a basic rate reduction from your income tax liability.

·      Tax year 2020/21: All financing costs you incur can be claimed as a basic rate reduction from your income tax liability.

According to the explanation on Gov.uk, the policy objective of this tax change is “to make the tax system fairer,” although it doesn’t say fairer to whom! And the wording of how the new tax calculation applies is not easy to understand. It’s certainly not fairer to landlords…

How it works

Let me give you a very basic before and after example for a higher rate (40%) taxpaying landlord who personally owns a property valued at ￡300,000 with a buy to let mortgage of ￡225,000 (75% LTV), receiving rent of ￡1,250 pcm:

PLEASE SEE ATTACHED PHOTO -  TABLE 1

 Inflation aside, that’s a 37% reduction in profit!!

NB: Do remember, this is a very basic example which only takes into the mortgage interest. It doesn’t include any other income you may earn, any other finance account related costs, or any non-finance related costs.

What can you do to mitigate the situation?

Simplistic answers are the obvious “find a cheaper buy to let mortgage rate” or “increase the rent you charge” but these aren’t always realistic or possible solutions.

You may have heard that many landlords have discovered that owning their rental properties in a limited company is a more tax-efficient option because they pay Corporation Tax not Income Tax and so the relief restrictions don’t apply. By the way, the main rate of Corporation Tax is currently 19% (tax year 2018/19). In the tax year 2020/21 it will be 17%.

But is it a better option? Let’s see how the higher tax rate paying landlord in the example above might fair if he owned the property in a limited company.

PLEASE SEE ATTACHED PHOTO -  TABLE 2

On the face of it, this is a much better fiscal and financial scenario both before and after:

BEFORE: In tax year 2016/17, the landlord makes ￡1,429.50 more net profit than if he were paying income tax.

AFTER: In tax year 2020/21, the landlord makes ￡3,217.42 more net profit than if he were paying income tax.

BASIC RATE TAX PAYING LANDLORDS BEWARE! The example I have given relates to a higher rate income taxpaying landlord. Additional rate income taxpaying landlords could find themselves even worse off. Perhaps, more importantly, don’t dismiss this article if you are a basic rate taxpaying landlord; you might find that because the tax is calculated differently, the taxable income calculation could tip you into the next tax bracket.

It is clear that investing through a limited company can save a lot of tax. However, the profits and cash held in the limited company will belong to the limited company and there will be further tax payment in order to extract the profits into the shareholders hands. 

In most cases there will be tax savings (compared with personal ownership) but you will need a tax specialist to advise you on your own circumstances. 

Why not transfer all the properties you already own into a limited company?

Transferring is not a legal option; the properties must be sold at the market value which means some or all of the following additional costs:

1.    Stamp Duty Land Tax at the higher rate will be payable on the purchase by the limited company, even it is your first property purchase by the company. 

2.    Capital Gains Tax owed by you personally when you sell the property

3.    Early Repayment Charges (ERCs) if you are still tied into your existing buy to let mortgage.

4.    Finance costs incurred by the limited company when taking out a new buy to let mortgage.

It’s worth reiterating that everybody’s circumstances are unique, so do seek the advice of a qualified accountant to find out if incorporating your portfolio is the best strategy for you.

If you find that incorporation is the way forward, do get in touch to talk through rates.

Should you make new purchases in a limited company?

Your accountant will be able to tell you if it makes sense for you to make all new purchases of buy to let property through a limited company. If it is, here are a few pointers to bear in mind.

Choice of lenders and mortgages for limited companies

Contrary to popular belief, there is quite a bit of choice. In Q4 2018 according to the Buy to Let Mortgage Index, 22 out of the 41 active buy to let lenders were, between them, offering 718 buy to let mortgage products to limited companies. That’s around 36% of all products.

If your broker has told you otherwise, it could be that they have no experience of these transactions and so are unaware of which lenders to approach. They may also be unable to access these lenders directly.

At Access Financial Serviecs, our landlord clients are increasingly choosing to make purchases of additional buy to let property using an SPV limited company 

Are buy to let mortgage rates higher for limited companies?

Yes and no! The very cheapest buy to let rates available in the market are generally not available to limited companies. HOWEVER, where a lender does accept limited companies, most are offering the same rates to both individuals and limited companies.

Is it complicated to set up a Limited Company?

No. It’s quick and easy and can be done online. There is another post on my page that explains how to set up an Special Purpose Vehicle limited company - the type of company most residential landlords use.

Can a newly established company get a buy to let mortgage?

Yes! A new company is not a problem as long as you are prepared to provide a personal guarantee for the loan.

Will the lender take a fixed and floating charge or debenture over the company?

Yes and no! That’s where a good broker like Mortgages for Business can help! Generally speaking these aren’t required on SPV limited companies but they may be if you buy the property using a trading business rather than an SPV.

Will you need to earn a minimum annual income?

Yes and no! Some lenders want to see proof of income of over ￡25k per annum. This can be salary, dividends, property income or combination of all of them. Different lenders will accept different income amounts and sources so all circumstances can be accommodated – usually! New companies won’t have any trading history or income so lenders will base their underwriting against your personal income.

Will I need to be an experienced landlord to borrow via a limited company?

If you want to jump straight into the HMO market without experience of being a landlord, your borrowing options will be restricted. The same goes for other, more complex properties like blocks of flats (often referred to a multi-unit freehold blocks), mixed used and commercial premises. Don’t get me wrong, it’s not impossible to find a lender but your application will need to be stronger in other areas to compensate.

Deposit - including directors’ loans, inter-company loans, gifted deposits, etc.

This is an area which it gets a little complicated as to what is acceptable or not but the fundamentals are, as long as you can provide evidence of the source of the funds, and they are legitimate, then lenders will be sensible. A common misconception is that you cannot raise money from one property to form the deposit for a BTL on a different property.

Wrong! This is actually one of the most common ways of a raising a deposit, often against your home or on another BTL property. Evidence of the source of funds can very easily be provided, usually with bank statements showing the deposit from another lender.

Are lenders’ borrowing criteria more restricted for limited companies?

Not really but they will be inquisitive about:

·      The total number of properties you own - both personally and in a limited company structure

·      The number of directors on the application – usually there is a maximum of four

·      How many shareholders the company has - sometimes people like to add children as shareholders which some lenders don’t like

Regardless of whether you are applying personally or via a limited company, lenders will be inquisitive about your credit history, the property type, the location and the loan to value.

Still interested in applying for buy to let mortgage via a limited company?

Then get in touch or if you would like to attend our 3 day Intensive Funding Masterclass and become a Financially Astute Property Professional then message me for more info.