Buy-to-let investors could see their income cut by £1,000 each year by purchasing through a limited company, research has shown.
A limited company borrower can expect to pay 3.41 per cent for a two-year fixed-rate 75 per cent loan-to-value mortgage deal, compared to 1.92 per cent for personal borrowers, according to independent broker Private Finance.
This means a landlord earning £46,010 annually - £35,000 base salary plus £11,010 in rental income - would have £36,194 in take-home income if purchasing as an individual, after tax and mortgage costs have been deducted.
But if the same landlord purchased through a limited company, they would earn £34,825 in take-home income - £1,369 or 4 per cent less.
Limited company buy-to-let lending rose in popularity following the changes to mortgage interest tax relief that were announced by 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.
Private Finance’s research suggests only landlords with multiple properties benefit from a limited company structure, with four properties being the tipping point.
Shaun Church, director of Private Finance, said: “The option to invest through a limited company has come under the spotlight recently as landlords look for ways to offset recent tax changes.
“But landlords shouldn’t rush into this assuming it’s a safe bet for saving money. Limited company mortgage products are available through a handful of smaller lenders, resulting in higher rates compared to personal borrowing. Investors need to drive down mortgage costs as much as possible to prevent this from eating into their profits.”
Mitch Hopkinson, director at London-based deVere, described limited company buy-to-let borrowing as a ‘minefield’.
“Someone buying properties to let out needs to think long and hard about whether limited company is the right thing to do,” he said.
“It presents a problem for the lender because it looks like you are lending money to a company, and therefore they are going through a different process that necessitates higher costs.
“The other factor is it is probably going to be more difficult to get the lending sourced than by borrowing as an individual.
“People buying as an individual and looking to flip into a limited company need to be very careful, as there is an unintended tax consequence. It can create a tax liability on capital gains tax and a stamp duty problem.”
simon.allin@ft.com
