(This guide has been produced for information purposes only. As a mortgage broker, we’re not able to offer tax advice).
Income tax relief on buy to let mortgage interest has been restricted but is it more tax efficient and financially better all round to operate your portfolio using a limited company?
If you’re a residential landlord, the main finance cost is the interest you pay on the buy to let mortgage but it may also include interest on loans to buy furnishings and any fees incurred when taking on these mortgages and loans.
As usual, the information on Gov.uk is typically vague about what is regarded as a finance costs, so please do make sure you take professional advice or ask your tax office for clarification.
From 6 April 2020, if you are a residential landlord and you own your rental property personally (i,e, not within a limited company), you will not be able to deduct the finance costs from your property income when calculating your taxable profit. Instead, you will just receive a basic rate of tax reduction on the finance costs from your income tax liability.
Because this is such a game-changer for landlords, the new regime was phased in over four years on the following basis:
- Tax year 2017/18: You can deduct 75% of your finance costs from property income. The remaining 25% can be claimed as a basic rate reduction from your income tax liability.
- Tax year 2018/19: You can deduct 50% of your finance costs from property income. The remaining 50% can be claimed as a basic rate reduction from your income tax liability.
- Tax year 2019/20: You can deduct 25% of your finance costs from property income. The remaining 75% can be claimed as a basic rate reduction from your income tax liability.
- Tax year 2020/21: All financing costs you incur can be claimed as a basic rate reduction from your income tax liability.
Why not transfer all the properties you already own into a limited company?
Transferring is not a legal option; the properties must be sold at the market value which means some or all of the following additional costs:
- Stamp Duty Land Tax at the higher rate will be payable on the purchase by the limited company, even it is your first property purchase by the company.
- Capital Gains Tax owed by you personally when you sell the property
- Early Repayment Charges (ERCs) if you are still tied into your existing buy to let mortgage.
- Finance costs incurred by the limited company when taking out a new buy to let mortgage.
It’s worth reiterating that everybody’s circumstances are unique, so do seek the advice of a qualified accountant to find out if incorporating your portfolio is the best strategy for you.
Should you make new purchases in a limited company?
Your accountant will be able to tell you if it makes sense for you to make all new purchases of buy to let property through a limited company. If it is, here are a few pointers to bear in mind.
Choice of lenders and mortgages for limited companies
There are not as many lenders in the Ltd company market as what there are in the personal mortgage market however there is still a very good selection of lenders to choose from.
Are buy to let mortgage rates higher for limited companies?
Generally – Yes! The very cheapest buy to let rates available in the market are generally not available to limited companies.
Is it complicated to set up a Limited Company?
No. It’s quick and easy and can be done online.
Can a newly established company get a buy to let mortgage?
Yes! A new company is not a problem as long as you are prepared to provide a personal guarantee for the loan.
Will the lender take a fixed and floating charge or debenture over the company?
Yes and no! Generally speaking these aren’t required on SPV limited companies but they may be if you buy the property using a trading business rather than an SPV.
Will you need to earn a minimum annual income?
Yes and no! Some lenders want to see proof of income of over £25k per annum. This can be salary, dividends, property income or combination of all of them. Different lenders will accept different income amounts and sources so all circumstances can be accommodated – usually! New companies won’t have any trading history or income so lenders will base their underwriting against your personal income.
Will I need to be an experienced landlord to borrow via a limited company?
If you want to jump straight into the HMO market without the experience of being a landlord, your borrowing options will be restricted. The same goes for other, more complex properties like blocks of flats (often referred to a multi-unit freehold blocks), mixed used and commercial premises. Don’t get me wrong, it’s not impossible to find a lender but your application will need to be stronger in other areas to compensate.
Deposit – including directors’ loans, inter-company loans, gifted deposits, etc.
This is an area which it gets a little complicated as to what is acceptable or not but the fundamentals are, as long as you can provide evidence of the source of the funds, and they are legitimate, then lenders will be sensible. A common misconception is that you cannot raise money from one property to form the deposit for a BTL on a different property. Wrong! This is actually one of the most common ways of a raising a deposit, often against your home or on another BTL property. Evidence of the source of funds can very easily be provided, usually with bank statements showing the deposit from another lender.
Are lenders’ borrowing criteria more restricted for limited companies?
Not really but they will be inquisitive about:
- The total number of properties you own – both personally and in a limited company structure
- The number of directors on the application – usually there is a maximum of four
- How many shareholders the company has – sometimes people like to add children as shareholders which some lenders don’t like
Regardless of whether you are applying personally or via a limited company, lenders will be inquisitive about your credit history, the property type, the location and the loan to value and for a limited company this will relate to all of the directors of the company – and potentially all of the shareholders as well.