Limited company buy-to-let could be the next PPI mis-selling scandal for mortgage brokers, according to an intermediary concerned about the potential for poor consumer outcomes.
Advisers have suggested clients may look to claim compensation after taking out buy-to-let loans through limited companies, after research showed people who do so could end up paying significantly more than personal borrowers.
The study, by independent broker Private Finance, revealed higher rates for limited company borrowing mean investors could see their income cut by as much as £1,000 each year compared to personal borrowers.
Limited company buy-to-let lending rose in popularity following the changes to mortgage interest tax relief that were announced by then chancellor George Osborne in 2015 and introduced on 6 April this year.
The changes mean mortgage interest tax relief will gradually be cut back to 20 per cent between 2017 and 2020 – but those borrowing through limited companies will not be affected.
Borrowing via limited companies surpassed personal borrowing for the first time in the second quarter of the year, accounting for 51 per cent of the value of BTL lending, according to Mortgages for Business.
Private Finance’s research suggests only landlords with multiple properties benefit from a limited company structure, with four properties being the tipping point.
Oliver Marley, mortgage adviser and head of research at London-based Independent James, said people in the business have been saying the number of advisers pushing landlords into limited company status is going to be the next PPI scandal.
“We have lots of advisers saying it is tax efficient, but they are not accountants,” he added. “I have heard a few advisers saying it is better for tax purposes.
“Limited company interest rates are normally higher and fees are higher. The way interest rates are at the moment it is a balance between the amount of tax and interest, and when we have looked at scenarios, they are not too far away from each other.”
Mr Marley also expressed concerns that government policy changes could see limited company borrowers taking a further financial hit.
“There is nothing really set to say that just because you have purchased a property using a limited company, the government are not going to change tax for limited companies. They could change it any day.”
Ruth Whitehead, principal at Ruth Whitehead Associates in London, said that while the scale of limited company buy-to-let lending was much smaller than PPI mis-selling, the principle remained the same.
She said: “It is a very litigious world we live in, and anyone who thought they had been short-changed would try to claim money back from them.
“I had a client try to sue me for arranging a buy-to-let mortgage rather than a residential one – but it was a buy-to-let property, and he already had a residential mortgage. He tried to sue me because the interest rate was higher.”
