Mortgages 

Buying to let as a limited company

This article is part of
The rise of specialist lending

Buying to let as a limited company

There are two ways of owning buy-to-let property: using your personal name, or through a limited company.

Since April 2017, there has been an increase in the number of landlords purchasing buy-to-let investments in a limited company rather than in their personal name. This is largely due to changes set out by the government in the 2017 Budget, including a reduction in the amount of tax relief available for interest on buy-to-let mortgages.

Previously, tax was due on the net rental income after allowable expenses have been deducted, including mortgage interest. This meant higher and additional rate taxpayers could claim relief at their highest rate, 40 per cent and 45 per cent respectively. The government’s announcement means that over the next four years, tax relief will gradually be reduced until only basic rate (20 per cent) relief is available.

One of the primary reasons for the growth in limited company buy-to-let ownership is the different tax treatment. Instead of paying income tax as an individual, a limited company pays corporation tax, which currently sits at 19 per cent. This is reducing to 18 per cent in April 2018 and 17 per cent in April 2019.

The differing tax treatment also means that lenders’ stress testing is often more favourable for lending to limited companies versus ownership in a personal name.

The mechanics behind a limited company purchase are that the borrower sets up a limited company or property special purpose vehicle (SPV), which is purely for the purpose of owning property. The borrower then deposits funds into the limited company and arranges lending to it, which, combined, allows the company to purchase the property.

While increasingly popular, there are several things to  consider and it should not be assumed that limited company buy-to-lets are suitable for everyone.

Tax implications

Tax should be favourable in the first instance, but once the income (rent) is paid into an SPV, profits will ultimately be distributed. This is usually done via dividends, which can be more complicated.

Only corporation tax is applicable at first when you do annual company accounts, but if you want to withdraw money, you have to do it in the form of dividends. Dividends are favourable at a low level, because the first £5,000 is tax free [£2,000 from April 2018], but this gets higher the more your draw out.

The latest tax rates according to HMRC are:

Basic rate

7.5%

Higher rate

32.5%

Additional rate

38.1%

Furthermore, when selling a property, the proceeds go into the limited company and there can then be tax efficiency challenges in accessing it.

For UK residents who have purchased in their own name, the sale of the property will be subject to capital gains tax (CGT) at either 18 per cent or 28 per cent. However, if it was bought in a limited company, it will be taxed – as above – at a rate of corporation tax.

Differences in lending

While lenders will still underwrite the director of the company’s circumstances, given that the limited company is legally a separate entity, the stress testing is favourable as a result of its tax position.