Limited Company Buy to Let mortgage
With the tax treatment of rental properties set to be punitive for the foreseeable future, more and more clients are turning to buying (or converting) investment properties via a Limited Company – a Limited Company Buy to Let.
This has a number of pro’s and con’s which we will outline below, but off the bat, we want to make it clear that you should get tax advice before deciding what is best for you. We are not tax advisors so can not assist that in regard, but we are specialists at putting the correct funding in place. So if this is of interest, please read on as we’ll cover off the main things to think about from a mortgage perspective:
What is a Limited Company Buy To Let?
It works the same in practice as a standard Buy To Let. But instead of you owning the property directly, it is purchased via an ‘SPV’ (Special Purpose Vehicle). This is a type of Limited Company, of which you or any other people you wish to buy the property with, will then own the shares of the company, which in turn holds the property(ies). These are very simple structures which any accountant can assist you with, or you could even do this yourself if you are familiar/confident in doing so.
Limited Companies are one of the great human inventions as it creates an abstract entity which removes some liability from you in order to do other things. A great deal has been written about this elsewhere and worth looking into, but in simple terms, very few would be willing to create new businesses or ideas as, if they went wrong, it could wipe you out financially as an individual. Therefore Limited Companies (or Limited Liability Corporations in the US which makes the purpose much clearer) came about to remove the ‘idea’ or ‘business’ from you, which limits your liability but then gives you a valuable asset you can then trade at a later date. Really quite fascinating when you really think about it.
A note of caution in specifics to mortgages is that a lender will generally require some form of guarantee from you as an individual when it comes to Limited Company Buy To Let lending. When these were last popular in the 90s, some people simply folded the companies when they went wrong and lenders got burned, so they are keen to not repeat those mistakes! Not always the case, but more common than not.
Why Buy a Buy-To-Let via a Limited Company?
The main reason will be the tax treatment and ease of transfers down the line. Limited Companies are subject to Corporation Tax which is lower than the higher income tax bands. So if you are subject to a 20% + tax rate (so your earnings are over £50k currently), you may benefit, as Corporation Tax is set to be 19% until 2023 (from that point it will go to 25%, which is still way lower than the higher income tax bands).
You can also offset the interest charged on a Buy to Let mortgage, whereas you cannot do that on a standard Buy To Let in your own name in the current tax scheme.
It is more flexible if you wish to transfer the shares at a later date. So for example if you want to pass your ‘shares’ to a family member, or simply sell them to someone else, that can be less cumbersome that selling the property as you would do normally and also trigger Stamp Duty charges. A note of caution again that there may be tax implications on this so please get advice before acting.
What are the main Pro’s
- Tax treatment as covered above.
- Lenders are more flexible in how they grant loans. Meaning it is easier to borrow more via a Limited Company than it is with a standard Buy To Let mortgage
- You can have up to 4 Directors in the company, which is often limited to 2 with standard Buy To Let.
- You can have under 18’s in the company (as long as at least one Director is over 18) on a Limited Company But To Let, where as on standard applications, everyone must be 18+. So this is advantageous if you are thinking dynastically or looking to mitigate Inheritance Tax down the line.
- Expert tax advice needs to be sought, as will an expert mortgage broker, as not all lenders deal with the public in this area. But that means you have a team of professionals advising you which means you should get the best possible outcome for you.
What are the main Con’s
- Not all lenders offer Limited Company Buy To Let’s, but that is changing. This is more the preserve of specialist Buy To Let providers, but the ‘High Street’ banks are increasing coming into this space, or allowing us access to their commercial divisions where this is standard practice.
- Due to the above, the pricing is more expensive. So while there may be a saving on tax, there will be an increase in running costs hence why it is so essential you get expert tax advice, so you can balance these elements off to see if it works for you or not.
- Lack of understanding in how this works. People often perceive it as complex or niche, and are therefore turned off by it. In practice it is often easier to get a Buy To Let loan approved this way, but it is understandable as not everyone is familiar with how Limited Companies work.
- If the tax regime changes, will it still be the best route? That is very much an unknown but certainly a perceived or real risk
The above just touches the surface, but the main point we wanted to make is that these are no longer niche, or scary things to consider. In fact it may work a lot better for any higher earners who want to purchase or retain some investment properties.
We would welcome any conversations with clients who are considering this as a route for them and can make referrals to any other advisor that is needed in the process if you do not have your own.
If you would like to speak to one of the team about your mortgage please call us or book a consultation with one of our mortgage advisers.
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Rose Capital Partners Limited is an appointed representative of PRIMIS Mortgage Network, a trading name of Advance Mortgage Funding Limited which is authorised and regulated by the Financial Conduct Authority.