Why limited company buy to let?
Recent changes to legislation have heightened the awareness of buy to let investors to purchasing property through limited companies and special purpose vehicles. If you are already a landlord who has not used limited companies for your buy to let purchase, you may wish to consider if Ltd Company ownership would be valuable to you.
If you are making a new buy to let purchase, or becoming an investor for the first time, it may sound complicated to set up a limited company to purchase your buy to let. But there are advantages for the limited company buy to let investor which should be considered. We outline them here.
Advantages of limited company buy to let
Higher rate tax relief
Between 2017 and 2020, the government restricted the amount of buy to let tax relief that an individual landlord can claim against their mortgage interest. Over the period, tax relief on your mortgage interest will be cut from its current maximum of 45% to 20% for top rate and higher rate taxpayers.
Since this change in tax relief on buy to let mortgage interest does not affect limited companies, there is a taxation benefit for the investor to hold a limited company buy to let.
Change in taxation of company dividends
There is currently an annual dividend allowance of £1,000. Therefore, if you are a director of a limited company holding buy to lets, you can potentially receive tax-free dividend on the investment income via the Ltd company.
Free investing to build your property portfolio with a limited company
Profits retained within your limited company are not liable to income tax. This generates cash to reinvest more quickly. Corporation tax on limited company profit is currently 18% but rising to 25%. This is well below the higher income tax rate of 40%.
This is a valuable tax benefit for the higher rate tax paying buy to let investor who owns their property through a limited company.
Long-term portfolio management
Where an investor has held a property portfolio over a period of time in their individual name it can become increasingly difficult to:
- Raise buy to let mortgage funding due to age restrictions
- Leave portfolios to the next generation without capital gains and stamp duty land tax implications
- Alter ownership easily for estate planning or tax planning reasons
Holding a buy to let property portfolio within a Ltd company removes these issues as it is the limited company that owns the property, and the shares in that company can be gifted, bought, sold and inherited.
Investment and withdrawal of funds within the business
If a limited company director makes a loan to the company. For example, to fund the deposit on a buy to let purchase. Those funds can be drawn back from the company when available without a taxation implication.
Disadvantages of limited company buy to let
Loss of capital gains tax allowance
An individual who realises a capital gain on selling a buy to let property would have an allowance against which to offset that gain (currently £11,100). A limited company selling the same property with the same gain would not have the benefit of a capital gains tax allowance.
Costs of running a limited company
In order to set up and run a limited company for the business of holding buy to let investment, there will be costs involved. Accountancy fees, legal fees, costs of annual returns, whilst unlikely to be major in terms of the overall costs of the business, these factors need to be considered.
Mortgage rates and mortgage lenders
Call us now for limited company buy to let mortgages on 020 8979 9684
Currently, many buy to let lenders do not offer mortgages to limited companies. Often, when they do, their product range is more restrictive and can be priced marginally higher. That is the nature of the market. Currently, our expectation is that, as buying and holding buy to let property through a Ltd company becomes more popular, more lenders will start to offer mortgages, and more competitive mortgages.
Mortgages and limited company buy to let
There are a few key things to note if you are seeking to raise buy to let mortgage funding for a limited company.
The majority of mortgage lenders offering limited company mortgages require the company directors to be experienced landlords. If you are a first-time landlord however, do not be put off because we do have access to lenders that will consider you.
The limited company obtaining the mortgage can be newly set up, an existing business, or a subsidiary of another business. Some lenders complicate the issue by requiring each property to have its own individual special purpose vehicle. We have access to mortgage lenders that do not request this.
Lenders will ask for Directors to provide personal guarantees for mortgage lending to the limited company and this is standard practice.
Products are available for limited company buy to let at up to 80% loan to value. Rates, although typically slightly higher than those available to individual investors, are still highly competitive. Since we have access to the whole of the UK buy to let mortgage market, we can find you the best deal available to your limited company.
Setting up a special purpose vehicle limited company
When you set up your limited company, you must have suitable SIC codes registered for the company.
- 68100 buying and selling of own real estate
- 68209 other letting and operating of own or leased real estate
- 68320 management of real estate on a fee or contract basis
- 68201 renting and operating of Housing Association real estate
You should register your limited company in England and Wales.
Underwriting of limited company mortgages
Mortgage lenders will look to underwrite both the directors and shareholders of the limited company. Personal guarantees will be required for all directors and shareholders (maximum of four).
Where a director or shareholder has an adverse credit history, it may not prove possible to obtain mortgage lending for the limited company.
In all cases, the company directors will be expected to obtain face-to-face independent legal advice when acting as guarantors for the mortgage.