Limited company mortgages

Major tax changes for buy-to-let landlords have been announced, and they’ll have an impact on a wide range of people involved in property and commercial property finance. Many landlords and owners of multiple properties will consider setting up a buy-to-let limited company to get around potentially painful new tax laws — in this article, we’ll take a look at why you might do this, and some of the key considerations if you’re thinking of doing so.

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Limited company mortgages

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Major tax changes for buy-to-let landlords have been announced, and they’ll have an impact on a wide range of people involved in property and commercial property finance. Many landlords and owners of multiple properties will consider setting up a buy-to-let limited company to get around potentially painful new tax laws — in this article, we’ll take a look at why you might do this, and some of the key considerations if you’re thinking of doing so.*

How to get a mortgage with a limited company

There have been big changes announced in the Chancellor's recent budgets that will affect anyone who owns multiple buy-to-let residential property (BTLs). New rules for both stamp duty and mortgage interest tax relief — to be rolled out over the next few years — will drastically change the economics of owning buy-to-let properties for many individuals. There's more detail on the changes below — here's an overview of the changes.

In a nutshell, what has changed?

The impact on private landlords who trade as individuals will be significant — they'll pay a lot more stamp duty when they purchase new properties, in some cases 3 or 4 times as much as under the current system. For many, that means buying new properties to add to a buy-to-let property portfolio could become prohibitively expensive.

Tax relief rules are also changing, so buy-to-let landlords who are in the top two income tax brackets won't be able to claim back as much of their mortgage interest. For most 40% and 45% taxpayers, that means they'll effectively pay more tax overall.

These two changes combined mean that for many it will be cheaper to run a buy-to-let business via a limited company, rather than as an individual. In more extreme cases, it may no longer be viable to run a buy-to-let business as an individual at all.

Limited company buy-to-let mortgages

The reduction of tax relief for individual landlords means that many people in this situation will choose to set up a limited company for their buy-to-let portfolio — for many, this will be cheaper overall. You can still get mortgages to purchase buy-to-let properties, but doing so through a limited company has different considerations to a standard buy-to-let mortgage.

Many specialist lenders offer options to buy rental property through a limited company — we work with a range of lenders across the whole market who can help, if you decide to incorporate for buy-to-let.

We also expect to see new products specifically for limited company buy-to-lets emerging in the next few months. In fact, one major lender has already announced a new buy-to-let mortgage for limited companies up to an 80% loan-to-value ratio.

Generally, it's already possible for a limited company to get a buy-to-let mortgage around 70-80% LTV, and most lenders are able to do this. Once you've set up the company, the rest of the process stays largely the same, with a few added administrative tasks. The deposit can be gifted or loaned to the company from your personal savings, and if you decide to sell the property in the future, the profits belong to the company. They can then be reinvested into new properties, or withdrawn and then taxed as personal income/capital gains.

You can also still get bridging loans, auction financeproperty development finance, and much more through a limited company — so once the initial setup is done, you can keep growing your property portfolio as normal.

Stamp duty changes: the detail

The first changes expected to come into effect will be the new rules for stamp duty (‘Stamp Duty Land Tax’), which apply from the start of the new tax year on the 1st of April 2016. Stamp duty is a tax paid when you buy a property, as a percentage of a property’s total value. It’s calculated using bands of value, in a similar way to how income tax is calculated, so the percentages go up as the value of the property increases. You don’t have to pay any stamp duty on properties worth less than £125,000, and then stamp duty goes up through 2%, 5%, 10%, and finally 12% for the most valuable properties. For example, for a house worth £275,000, stamp duty would be broken down as follows:

  • 0% on the first £125,000 = £0

  • 2% on the next £125,000 = £2,500

  • 5% on the final £25,000 = £1,250

It all adds up to £3,750, or effectively 1.36% of the property’s total purchase price. So far, this is probably all sounding like yet another entry in the ‘boring tax facts’ category. But here’s how it will affect buy-to-let landlords:

How stamp duty changes will affect buy-to-let landlords

Currently, stamp duty is the same for all private individuals — whether they’re full-time landlords or the co-signing parents of first-time buyers. However, the new rules, coming into effect on the 1st of April 2016, make stamp duty 3% more across the board for those who already own a property in England and Wales (the rules for Scotland are different). So if the purchased property is a buy-to-let or a second home, rather than being 0%, 2%, 5%, 10% and 12%, the stamp duty will be 3%, 5%, 8%, 13%, and 15%. Three percent might not sound like much, but it makes a big difference in some circumstances. Let’s use the same example of a property worth £275,000. With the new buy-to-let stamp duty rules, a landlord who already owns multiple properties would have to pay the following:

  • 3% on the first £125,000 = £3,750

  • 5% on the next £125,000 = £6,250

  • 8% on the final £25,000 = £2,000

Those percentages even out to 4.36% effectively, and for a property of the same value as our first example you’d pay a whopping £8,250 more — £12,000 in total, more than three times as much.

Tax relief for landlords is also changing

To make matters worse, landlords will have their tax relief cut too. Currently, private buy-to-let landlords who pay 40% or 45% tax (the two highest income tax bands) can claim back 40% or 45% of their mortgage interest costs. With the new rules, however, an individual will only be able to claim 20% tax relief from mortgage interest on buy-to-let residential property.

That means taxpayers in the two highest bands (40% and 45%) will have their tax relief significantly cut. The changes will be phased in over 4 years, starting in 2017.

Limited companies and buy-to-let landlords: the detail

These changes combined will make life more difficult for buy-to-let landlords acting as individuals. But for certain situations, a limited company wrapper might be a good solution. Here’s why buy-to-let landlords might want to use a limited company or special purpose vehicle (SPV) for their rental business.

Holding the properties in a corporate structure would change the tax implications of mortgage interest on the rental properties; when the assets are owned by a limited company, such costs would be accounted as expenses, and therefore would reduce the total amount of taxable profit. For high-rate taxpayers, this would likely be a favourable change, because a company pays tax on profit, but individuals pay tax on income.

On the same theme, companies also pay a lower tax rate than individuals. Corporation tax is currently 20%, and is expected to drop to 18% by 2020. And finally, if a company reinvests profits its tax bill is reduced, which means you could use rental income to expand your portfolio, without incurring extra costs. All this means that wrapping a buy-to-let portfolio in a limited company might be a good thing to do.

Other considerations

However, if you were thinking of transferring buy-to-let properties to a limited company wrapper, you’d have to account for setup costs. For example, you’d almost certainly want to talk to a qualified accountant to make sure your plans stack up; there would also be implications for capital gains tax and stamp duty. These two combined might make the move expensive enough to discourage a landlord.

Some commenters have recently suggested that another effective strategy could be keeping properties you currently own as privately-held, and starting a limited company for any future property purchases. It’s also worth thinking about your medium- and long-term goals. If you don’t need access to the money tied up in your BTL property, an incorporated structure makes sense. On the other hand, if you’ll regularly move money in and out of the company, capital gains tax, stamp duty and inheritance tax could all come in to play.

Running an incorporated company also comes with inherent administrative tasks and responsibilities, like record-keeping, as well as filing annual returns and accounts. These responsibilities are there regardless of whether yours is an incorporated property company. It will also take a few months to get everything set up — a general rule of thumb might be that a company structure makes sense for BTL landlords who own lots of properties, but might not be worth the trouble for buy-to-let investors who own one or two properties.

Finance your buy-to-let limited company

There are lots of things to think about if you’re looking into setting up a limited company to handle your buy-to-let properties. In many cases, it’s a favourable move, but everyone’s situation is different — and many different areas of private and commercial tax law are a part of the discussion!

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