Limited Company Buy to Let
Investing in residential property on a business basis can be funded in various ways. However, you achieve a higher yield for your disposable funds if you gear purchases with a mortgage.
We have access to lenders who are happy to lend on multiple properties and most types of property including HMOs and student lets.
Do to the recent tax changes, there is a powerful argument to purchase through a Limited Company. It is important you understand the advantages, disadvantages and responsibilities associated with company ownership before making a decision. We would certainly suggest that you seek our advice before proceeding.
Should you set up a Limited Company for your Buy to Let properties?
There is not a straightforward answer to this question. For each case, the response could differ depending on personal circumstances, future intentions, and the availability of mortgage finance to Limited Companies for the purchase of Buy to Let properties. You should also be mindful that a Limited Company is required to file the accounts and financial status of the entire property portfolio with Companies House on an annual basis. However, in general terms we would recommend a limited company for people in a higher income tax bracket. Also, those intending to purchase more than one property and with an intention of building a portfolio.
Nature of business (SIC)
Most lenders who will consider lending to a limited company will require you to set up a special purpose entity (SPE), also called a special purpose vehicle (SPV). In this case this means a limited company with Standard Industrial Classification (SIC) restricted to the buying, selling, holding and managing of real estate. So if you already own a trading company, you may not be able to use this to obtain a limited company buy to let mortgage. However, there are a few exceptions and so it just means you will be restricting your choice of lenders if you do not have such an SPE. Some of the current acceptable SIC codes are:
Fixed charges. Floating charges. Debentures. Personal guarantees. What type of security lenders may require when the borrowing is made by landlords using a limited company? Please follow this link for details.
Advantages of using a Limited Company
Disadvantages of using a Limited Company
We have access to lenders who are happy to lend on multiple properties and most types of property including HMOs and student lets.
Do to the recent tax changes, there is a powerful argument to purchase through a Limited Company. It is important you understand the advantages, disadvantages and responsibilities associated with company ownership before making a decision. We would certainly suggest that you seek our advice before proceeding.
Should you set up a Limited Company for your Buy to Let properties?
There is not a straightforward answer to this question. For each case, the response could differ depending on personal circumstances, future intentions, and the availability of mortgage finance to Limited Companies for the purchase of Buy to Let properties. You should also be mindful that a Limited Company is required to file the accounts and financial status of the entire property portfolio with Companies House on an annual basis. However, in general terms we would recommend a limited company for people in a higher income tax bracket. Also, those intending to purchase more than one property and with an intention of building a portfolio.
Nature of business (SIC)
Most lenders who will consider lending to a limited company will require you to set up a special purpose entity (SPE), also called a special purpose vehicle (SPV). In this case this means a limited company with Standard Industrial Classification (SIC) restricted to the buying, selling, holding and managing of real estate. So if you already own a trading company, you may not be able to use this to obtain a limited company buy to let mortgage. However, there are a few exceptions and so it just means you will be restricting your choice of lenders if you do not have such an SPE. Some of the current acceptable SIC codes are:
- 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 (not always relevant to lenders on it's own)
Fixed charges. Floating charges. Debentures. Personal guarantees. What type of security lenders may require when the borrowing is made by landlords using a limited company? Please follow this link for details.
Advantages of using a Limited Company
- Higher tax relief - From 2017 to 2020 the amount of Buy to Let tax relief individual landlords can claim back will be progressively cut from a maximum of 45% to 20% for top rate taxpayers. However, this change does not affect Limited Companies. Therefore, if you are a top rate taxpayer, the tax payable via a Limited Company will be lower than tax on individual income.
- No tax on dividends ≤£2,000 for individuals – from April 2016, the Dividend Tax Credit was replaced by a new tax-free Dividend Allowance. This means you can potentially receive tax free dividend income from their investment properties.
- No income tax when reinvesting profits to secure further properties – You could grow a BTL portfolio more quickly within a Limited Company as there will be no income tax on the retained profit, thus allowing more cash to re-invest.
- Although corporation tax is payable on trading profits (19% at 2020), this is lower than the higher income tax rate of 40% and 45% for additional rate.
- Personal funds can be drawn back out of the company - any advances your client makes to their Limited Company (e.g. the mortgage deposit), they can draw back out of the company by way of Directors Loan.
Disadvantages of using a Limited Company
- No Capital Gains Tax (CGT) allowance when the company sells a property – whereas individuals selling a property would have £12,300 CGT allowance (2020/21) at standard rate.
- Additional cost of running a Limited Company - such costs include the preparation of accounts, company tax and corporation tax calculations for HMRC, filing at Companies House, legal fees, and annual auditing if applicable. Your accountant may also charge higher fees when preparing accounts for Limited Companies.
- Higher mortgage rates – Most lenders charge higher interest rates and fees for Limited Companies compared to Individual Buy to Let mortgages.
- Reduced choice of lenders and mortgages – Many lenders do not offer mortgages to Limited Companies, and often if they do, the product range is much smaller. However, we can offer almost as many Limited Company products as Individual products, ranging from 65% LTV up to 80% LTV.
For further analysis with examples of the impact of recent changes to taxation of Buy to Let income and Mortgage Interest.
Please click here