Why are some landlords incorporating their buy to let business?
A limited company buy to let business may offer attractive financial benefits to some landlords – for example, higher rate taxpayers who have a portfolio of properties may find it more tax-efficient to own them within a limited company.
It is important to note, however, that even with tax savings, a limited company landlord may end up worse off financially. That is why it is essential to seek independent, professional advice.
What stimulated the move to incorporation?
This move towards incorporation was stimulated following the decision of the then Chancellor George Osborne in 2015 to phase out tax relief for landlords on mortgage interest repayments.
In an article dated the 30th of October 2019, consultants BDO explain that, with effect from the 1st of April 2020, landlords will only be able to claim income tax relief on mortgage interest repayments at the basic rate of 20%. Taxpayers on the higher or additional rate of income tax are then taxed on their buy to let income at 40% or 45% respectively.
If your buy to let properties are transferred to a limited company, however, your corporate profits are subject only to corporation tax – which, following the Spring Budget 2020, has remained at 19% despite previous plans to reduce it.
Can I save money by forming a limited company for my buy to let business?
Even if you are paying income tax at the basic rate of 20%, your tax liability reduces once the properties are transferred into a limited company – and if you are paying income tax at the higher or additional rate, the savings might be substantial.
However, it is also important to consider the costs involved – both in setting up and managing the company (e.g. legal fees, accountancy fees, Corporation Tax and so on) and the implications of the transfer of the properties you currently own into a separate legal entity, the company.
Probably the most significant implication on that transfer to new ownership is the likely need to remortgage your buy to let property and seek a specialist limited company buy to let mortgage.
You might need to offset the cost of raising any additional cash to finance the remortgage against any potential tax savings.
You should always speak to a qualified accountant about any potential tax benefits or liabilities.
What benefits can a limited company BTL mortgage offer?
There are potentially several benefits, including it is typically easier to expand your portfolio and, future proofing.
Expanding your portfolio requires capital funding. The retained profits within the company are a potential source for that. Retained profits are typically protected from personal tax liabilities due to the fact you personally are not making a capital gain.
It is the legal entity, your business, that has made the profit. That means potentially more retained capital is available as a source for future portfolio expansion funding.
- Future proofing
Things change, and if they need to, you’ll appreciate simplicity and flexibility.
It’s typically easier to change registered ownership of a limited company than to try and do the same with privately held property. The reason is that with a company, the property’s ownership does not change. That’s important if you are seeking to insulate the transaction from Inheritance Tax, as well as Stamp Duty and CGT.
All these things are attractive if you’re considering possibly transferring your business to your family at some time. (Please let your mortgage advisor know if this strategy forms part of your future plans).
What else do I need to think about if I am considering incorporation?
- You will have limited liability, but …
One of the fundamental reasons for owning a limited liability company is that, typically, you’re not personally liable for the company’s debts. That applies to losses on buy to lets.
Do keep in mind though that you may be bound by liabilities arising from any personal guarantees you offered your mortgage provider in support of your application.
- You will lose your Capital Gains Tax allowance but …
Where a limited company sells a property, there is no capital gains tax allowance. By contrast, if an individual sells a buy to let, they’ll typically receive an allowance – in other words, a sum considered outside of CGT levies.
How much that entails will depend upon the year they sold the property. For sales in the 2019-2020 tax year, the allowance is £12,000.
CGT would apply to any sum above the allowance.
However, CGT isn’t payable on buy to lets owned by limited companies. Instead, the company would be liable for Corporation Tax without an allowance.
Paying Corporation Tax may prove to be more cost-effective but would vary depending upon the profits made from the sale of the buy to let.
How big a deposit do I need for a limited company buy to let mortgage?
The deposit you need is determined by the lender’s assessment of the maximum loan to value (LTV) ratio of the advance – the size of the mortgage advance in relation to the value of the buy to let property you are buying.
That assessment naturally takes into account a host of factors – principally aimed at determining the affordability of the mortgage loan with respect to the financial standing of your company. For example, a credit check on your company’s past management of previous credit and borrowing; the length of time you have been trading as an SPV; and, the audited accounts of your company.
If your company manages to score highly on all such factors, a mortgage lender may be prepared to advance a loan to value mortgage as high as 85% – in other words, you may need to put down a mortgage as little as 15% of the property’s purchase price.
If there are less favourable factors to be considered – your limited company is not an SPV, for example – the number of lenders interested in granting a mortgage is smaller, and you may be offered an LTV of only 75% or less.
If I am already trading as a limited company, can I get a mortgage?
Lenders typically limit the mortgages they grant to companies specifically set up to own and let property – limited companies specifically in the business of buying to let.
That type of limited liability company is called a special purpose vehicle (SPV) – a company set up with the specific, special purpose of owning and managing properties for let.
While the number of mortgage lenders prepared to consider applications from SPV companies is relatively small, again, we can help you access what we consider is an appropriate deal.
Does the limited company buy to let mortgage lender consider the rental income the company is likely to earn?
One of the most critical factors determining the affordability of any mortgage loan is the rental income your company is likely to earn from the buy to let property in question.
Typically, you may need to demonstrate a realistic rental income of at least 125% of the monthly repayments of any mortgage. In some cases, those earnings may need to be 150% or even 180% of the monthly mortgage repayment instalments.