According to one of Britain’s leading buy-to-let mortgage companies, over 75% of borrowing for buy-to-let purchases will be made through limited companies in the next year. The market survey results reveal that numbers are already well up compared to last year.
Broker Mortgages for Business revealed in July that lending to limited companies accounted for 30 per cent of all buy-to-let purchases in the first half of this year, compared to 18 per cent in the first half of last year.
They also say that the number of lenders offering products and the number of products available to limited companies has shot up.
This has, it seems, led to a surge of would-be landlords wondering whether they should buy their investment property through a limited company.
Why invest through a limited company?
1. Tax treatment of profits
If you own a property in your own name, the profits you make from renting it out will be added to your other earnings (such as from your job) and taxed as income tax. But if instead you hold it within a company, the profits will be liable for Corporation Tax instead.
The rate of Corporation Tax is currently 20% (if your profits are below £300,000), which means your tax liability is halved compared to if you’re paying income tax at a rate of 40% or higher.
You will still be taxed on the dividends if you take profits out of the company, but there’s flexibility: you can time your dividend payouts for maximum tax-efficiency, or distribute them to family members who are only basic rate taxpayers – or just leave the profits rolling up within the company to buy the next property.
2. Tax treatment of mortgage interest
As of April 2020, mortgage interest will no longer be an allowable expense for individual property investors (they’ll claim a basic rate allowance instead) – but it will continue to be allowable for companies that hold property.
(The change is being phased in from April 2017 – http://www.propertygeek.net/budget-2015-mortgage-interest-relief-changes-explained/)
3. Opportunities to mitigate inheritance tax
If you owned a business and passed it on when you died, it would qualify for Business Property Relief – meaning that no Inheritance Tax would be due when shares in that business were passed on.
However, Business Property Relief isn’t available to companies which are “wholly or mainly in dealing in securities, stocks or shares, land or buildings, or in making or holding investments”.
As a property investor, that means you. So to avoid your heirs having to write a 40% cheque to HMRC, you need to structure the ownership of your company a little more cleverly – such as by using an “employee ownership trust”. The details are beyond the scope of this post, but the point is that it’s possible and a clued-up accountant should be able to help you set it up.
Why not invest through a limited company?
The big drawback when it comes to using a limited company is to do with lending: specifically, that most normal buy-to-let lenders won’t lend to limited companies at all. Some may do if they’re given a personal guarantee by the directors too, but for the most part the only option for a company is going to be using commercial lenders.
Commercial finance is harder to come by, the interest rates tend to be higher (and often on repayment rather than interest-only terms), and at lower loan-to-value ratios.
There are other drawbacks too (like the extra expense and hassle of filing annual company accounts), but access to finance is the single factor which prevents many people from using a limited company.
However, given the rush of investors into limited companies which is likely to take place over the next few years, buy-to-let lenders responding by opening up their product range to limited companies – albeit still requiring personal guarantees, and with rates and fees being somewhat higher.
Source: http://news.houseladder.co.uk/news/buy-to-let-through-limited-companies-surges/; http://www.propertygeek.net/buying-property-through-a-company/
Are you thinking of investing in a buy-to-let property? Setting up a company could limit your tax bill and make it easier to pass your investments to children or grandchildren. North Point Global can also introduce you to our partners who can assist you with the opening of a UK Company and opening your UK bank account together with the filing of your tax returns, you can register here for further details – ljsaccountingservices.com
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