Should you buy to let through a limited company?

As buy to let mortgage advisors, we are often asked by our customers if they should own their investment property personally, jointly with their spouse or if they should buy to let through a limited company.

As is often the way with financial queries, there is no one-size-fits-all response. Managing a buy-to-let through a limited company can have tax advantages, but it depends on your intentions, such as:

  • The length of time you intend to retain the property.
  • Whether you rely on the income generated from month to month or whether you want to roll up the income to invest in further property.
  • Your tax position from both an income tax and capital gains tax perspective.

There are other factors that could affect your decision as well, such as the impact on mortgage rates and fees. Read more about what can affect your mortgage application.

Why do some people use limited companies for buy to let?

The mortgage interest relief restriction, which is being phased in over four years having started in April 2017, is the main driver for more people looking at this model. As landlords lose tax relief benefits many are looking for a solution to keep their portfolio profitable.

Recent, multiple, changes to the tax treatment of transactions regarding the purchase and running of investment properties will, undoubtedly, have increased the costs of running both a single investment property or a portfolio of properties regardless of the size of the portfolio.

Choosing to set up a limited company to purchase and manage your buy to let property/properties is not a straightforward correct answer however. Depending on your circumstances and income sources, either personal ownership or company ownership could be the more profitable solution.

For this reason, you should always seek accountancy advice from a suitably qualified and experienced accountant when buying or considering changing the type of ownership of an investment property.

The scope of this blog is not to provide tax advice, but to help you form an opinion on how you should own investment property. We strongly suggest that you check with your mortgage advisor and tax advisor before making any changes.

Personal ownership of a buy-to-let property

The simplest and most common form of ownership is now no longer a straightforward choice. Recent changes to the way owners can offset the cost of mortgage interest against the rental income can now have unexpected consequences.

The 2017/2018 tax year was the first of four transitional years whereby higher rate tax relief on mortgage interest is being faded out. However, what may not be so obvious is the effect of these changes on basic rate tax payers.

The previously allowed tax relief on mortgage interest has been phased out by 25% each year until the 2019/2020 tax year when it will have completely disappeared. Instead, a tax credit is being applied after your property profits have been calculated. The tax credit is equivalent to basic rate (currently 20%) tax relief on the mortgage interest.

If you are a basic rate tax payer with income just short of the higher rate threshold, your rental income (less allowable expenses, not including mortgage interest) will now be added to the rest of your income to set your highest rate of tax.

The tax will then be calculated before the tax credit for mortgage interest is applied. This will push some property investors into higher rate tax with resultant larger tax bills.

It goes without saying that those property investors that were already higher rate tax payers will receive significantly larger income tax assessments than previous years, even if nothing else has changed within their property portfolios or earned income arrangements.

Joint ownership of a buy-to-let property

If your spouse or partner has no or a low income, it is worth considering owning a property jointly as the profits can be split between the two of you. At a minimum, this will leave 50% of the profits subject only to basic rate tax and mitigate the possibility of higher rate tax assessments on the higher earning partner.

It may be possible, when buying a new property jointly as tenants in common, to declare an ownership that is not equally split, making the lower earning partner responsible for most of the profits from the property.

However, care should be taken to check with your tax advisor that HMRC are likely to accept this ownership scenario before committing to the purchase, as it may not be acceptable to HMRC as a matter of course.

It is also possible to arrange a joint borrower sole owner mortgage, whereby the partner with low or no income owns the property but both partners are party to the mortgage. This type of arrangement allows the rental income to benefit from the low or zero income tax liability of the lower earning partner whilst at the same time benefitting from the borrowing ability of the higher earning partner.

Corporate ownership of a buy-to-let property

A further option for property investors is to purchase the property by using a limited company with the investor(s) being company directors and shareholders of the company.

An immediate advantage of this route is that presently, limited companies are able to offset all of its mortgage interest against profits from the rental income. The subsequent profits are then subject to Corporation Tax, currently at 19% but expected to reduce to 19% (2020/2021 financial year).

This is good news if the investor doesn’t need the income for current expenditure as the profits, taxed at less that the basic rate of income tax, can be used to reinvest in further property ownership for the limited company as opportunities arise.

What if you need to draw an income from your buy to let limited company?

If the income is required, consideration needs to be given to how the profits are taken from the company. The income can be taken in more than one way:

  1. Salary paid to the directors
  2. Dividends paid to the shareholders
  3. Contributions to a pension for the benefit of the directors

If a director is on otherwise low or no income, it may be advantageous to pay a salary subject to normal income tax rules. Up to approximately £8,000 per annum can be paid with no liability to National Insurance Contributions or Income Tax.

Up to £12,500 per annum can be paid with no liability to income tax but both the director and the limited company will incur separate liability to National Insurance Contributions and Income Tax.
Over £12,500 per annum income tax will also be payable. Any salary paid is an allowable expense against the profits of the limited company.

The liability of the limited company as well as the individual director to National Insurance Contributions will make the option of distributing the profits as dividends to the shareholders more attractive in most cases.

However, although Corporation Tax has already been paid by the limited company on these profits, a further Dividend Tax is payable by the recipient shareholder(s) on any dividends after a £2,000 (£5,000 before 6th April 2018) tax free allowance has been used up. The rate of Dividend Tax will increase according to the shareholders income tax rate.

The limited company can also make contributions to a suitable director’s pension scheme. These contributions may attract Corporation Tax relief. I don’t intend to elaborate any further on this topic other than to say you should take advice from a suitably qualified Pension Advisor if this is an avenue you wish to pursue.

Interest rates for limited company mortgages

A further consideration when deciding how to buy an investment property is the effect on interest rates for any required mortgage. All current UK lenders that lend for the purpose of buying an investment property will lend to individuals that meet their criteria, jointly or in sole name.

However, not all lenders will lend to Limited Companies. Lenders that are prepared to lend to limited companies will often charge higher rates and larger fees than if you bought in your own name(s).

You may also incur higher legal costs with your solicitor or conveyancer for the additional work involved in dealing with the limited company as well as yourselves.

Lenders will often be more generous in the amount they are prepared to lend on any given property bought within a limited company. This is because the amount of mortgage interest tax relief available to the limited company is unrestricted as compared to the new rules for private individuals purchasing a property.

Finally, you will need to set the company up, open a bank account for it and be prepared to give the mortgage lender personal guarantees as directors. It is a good idea to consult with a suitable qualified mortgage advisor first though as different lenders can have different requirements for the way a limited company is created.

Should I transfer my existing buy to let portfolio to a limited company?

If you have an existing portfolio, it is possible to transfer ownership from your own names to a limited company if that suits your needs and circumstances.

If you decide to transfer your property portfolio to a limited company, you will trigger a sale and repurchase. Doing so will incur capital gains tax, stamp duty and the legal, mortgage and valuation fees.

It is also important to note that limited companies do have running costs and legal requirements such as filing accounts. However, you will gain the advantage of tax deductible expenses such as mortgage broker fees and lender arrangement fees.

This is a highly specialised area and if you are considering taking this action, contact an experienced buy to let mortgage broker, who will be able to support you with the provision of expert mortgage advice backed up by introductions to suitably experienced accountants and lawyers if necessary.

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