Should I invest in a Ltd Co or in my Personal name?

Welcome to the latest edition of The Business Owners’ Property News - my weekly newsletter dedicated to helping business owners get started in property investing.

Today we are going to explore buying property in a Ltd company v buying in a personal name.

Ltd or Personal - what should I do?

Well, in the true style of an Accountant, I’m going to say it depends! A lot hinges on your personal situation, current income and tax rates, your growth plans and your long term strategy. The easy answer is to chat first to your Accountant for tailored advice.

But here are some facts, figures and considerations for you to know before you make that decision.

Current Trends

Landlords can choose to buy investment properties in their own name or via a company structure. Around 75% of buy to let properties purchased in 2023 have been bought in limited companies, which shows that landlords prefer Ltd co ownership.?This?is up from 68% cent last year and 41% in 2015, according to research by estate agency Hamptons. ?

One of the main reasons is the advantageous tax treatment of mortgage interest in a Ltd co compared?to in personal names - even more so now because of the soaring costs of borrowing.

Section 24

The trend for Ltd co ownership accelerated when full tax relief on mortgage interest for buy to let owners who own property in their personal names was phased out between 2017 to 2020 through the introduction Section 24 of the Finance Act 2015. This is one of the biggest challenges landlords have had to face in modern times!

Before 2017, landlords holding property in personal names could deduct mortgage interest costs from their rental income when calculating profits and claim relief at their personal rate of income tax. Since the changes, claims are limited to the 20% basic rate, leaving landlords who pay the higher or additional rate facing higher costs.

However, full mortgage interest deductibility is still available to limited company owners.?

Soaring interest rates

We all know that landlord mortgages jumped last year after “that budget” causing mayhem in the money markets! And, there has been a sustained Bank of England fight against high inflation via in increases in the base rate.?

In December 2021, average rates on two-year buy to let mortgages were 2.9%. Today, they are 6.6%, according to Moneyfacts.

“The rush to incorporate started six years ago and the rise in interest rates has just exacerbated this. It’s become an even more pressing issue,” said Sean Randall, a partner at tax adviser Blick Rothenberg.

At the time of writing, competition is returning to the mortgage market. Many lenders cutting rates, as UK inflation — and banks’ costs of funding via swap rates improves. The Mortgage Works, the buy to let arm of Nationwide, recently announced it was cutting rates by up to 0.5 percentage points. TSB and NatWest also dropped rates on their buy to let ranges.

Rental Cover

More attractive rental cover ratios is another factor in the growth of limited company landlords. Lenders want rental income to cover mortgage payments with some headroom. Chris Sykes, consultant at broker Private Finance, said the standard coverage was 145% of the mortgage cost, “whereas it’s 125% for properties held within a limited company, offering the potential to borrow more”.

(Please note that rates charged on limited company lending are typically higher than those offered to individual owners).

Start as you mean to go on!

In many situations, if you are going to create a growing portfolio for the long term, Ltd co ownership is going to be the option for many business owners. If immediate income is not the plan and rental profits will be retained for further growth, Ltd co ownership begins to make sense. Remember, in a Ltd Co structure, profit is taxed at co level and again at personal level when extracted as income. So if you don't need the income, the profit is taxed only at Ltd Co level, where corporation tax rates are usually lower than personal rates.

For business owners it makes sense to start as you mean to go on. Starting off buying property personally and then switching ownership to a company structure will typically incur stamp duty land tax and the individual may face a capital gains tax bill when selling to the Ltd co.?

So, get it right at the start!

Limited Liability!

If I buy in a Ltd co, if things go wrong, I can walk away from the mortgage right - due to limited liability??

WRONG! All lenders will ask for a personal guarantee from the individuals involved in a company or group structure and furthermore you will need independent legal advice to ensure you understand the personal obligations! So, in terms of liability, there is little difference between personal and corporate ownership where paying for the mortgage is concerned!

Should I let the tax tail wave the property dog?

Most people cite tax as the main reason behind choosing to have a corporate vehicle for property investing. But there are other considerations.

Business owners understand Ltd companies and a property co can fit in a group structure with the investor's other companies. Company structures allow different ownership options with different classes of shares and shareholders and family members such as children can be introduced into the property business through creation of new shares.?

Company structures allow joint ventures and can ring fence projects and assets by putting them in different corporate structures.

What next?

As I said at the outset, the best person to talk through your plans is with your Accountant or engage a good property Accountant that can tailor a corporate plan in line with your circumstances.?

But now you are armed with some of the considerations to have that conversation!

For any further information or to find out how we are helping business owners get started in property investing - get in touch!